Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt FINRA Rule 3210 (Accounts At Other Broker-Dealers and Financial Institutions) in the Consolidated FINRA Rulebook, 48941-48949 [2015-20006]
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Federal Register / Vol. 80, No. 157 / Friday, August 14, 2015 / Notices
In order to motivate data recipients to
comply with the display statement
requirements, including the requisite
declarations and screen submissions,
the Amendment establishes a noncompliance fee for each month of noncompliance. For each of Network A and
Network B, the monthly fee is $3,000.
A datafeed recipient must submit the
required screen prints upon the
Amendment’s implementation date 8 or
within thirty days of the effective date
of its Vendor Agreement. It must submit
those screen prints (including
previously provided, new, or changed
screen prints) annually by the 31st day
of January.
The non-compliance charges will be
assessed against a data redistributor for
each month in which it fails to provide
the declaration or a copy of a
Consolidated Volume screen print with
the required display statement in a
timely manner. The charge will also be
assessed against a data redistributor
each month for non-compliance by
persons in the redistribution chain
starting with the data redistributor
where such persons have not entered
into an applicable agreement with CTA.
The Approving Participants expect
the non-compliance charges to provide
incentives for data redistributors to
comply with the consolidated volume
requirements; they do not view the noncompliance fee as establishing a new
revenue source. Rather, they hope it
encourages all data redistributors to
submit their declarations and screen
prints (where applicable) in a timely
fashion. They hope that the fee will
motivate non-compliant redistributors
to adopt the same practices that the
majority of redistributors follow.
The Approving Participants included
delayed displays of consolidated
volume in the Amendment to make it
clear that if a data redistributor
accompanies displays of real-time
unconsolidated prices and quotes with
delayed consolidated volume, it is
subject to the new requirement.
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III. Discussion
After careful review, the Commission
finds that the proposed Amendment to
the Plan is consistent with the
requirements of the Act and the rules
and regulations thereunder,9 and, in
particular, Section 11A(a)(1) of the
8 The Approving Participants indicated that they
will give notice of the compliance fee to all data
redistributors no less than 120 days prior to its
implementation. See August 6 Letter.
9 The Commission has considered the proposed
amendment’s impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
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Act 10 and Rule 608 thereunder 11 in that
it is necessary or appropriate in the
public interest, for the protection of
investors and the maintenance of fair
and orderly markets, to remove
impediments to, and perfect the
mechanisms of, a national market
system.
The proposal is consistent with
Section 11A(a)(1)(C)(iii) of the Act,12
which sets forth Congress’ finding that
it is in the public interest and
appropriate for the protection of
investors and the maintenance of fair
and orderly markets to assure the
availability to brokers, dealers, and
investors of information with respect to
quotations and transactions in
securities. These goals are furthered by
the proposed changes to establish a fee
that will be charged to a vendor or other
data redistributor that fails to comply
with the CTA Plan participants’
Consolidated Volume display statement,
and related requirements. Consolidated
data continues to provide a great deal of
value for investors in assessing the
current market for trades and the quality
of the execution they receive for their
trades. The Commission believes it is
important for market participants to
know when Consolidated Volume is
displayed alongside unconsolidated
prices and quotes by data redistributors.
The Consolidated Volume display
policy should provide greater
transparency on the source of the data
for users of displays that contain both
consolidated and proprietary data from
redistributors. Additionally, the noncompliance charge should provide
incentives for data redistributors to
comply with the Consolidated Volume
requirement.
IV. Conclusion
It is therefore ordered, pursuant to
Section 11A of the Act,13 and the rules
thereunder, that the proposed
Amendment to the CTA Plan (File No.
SR–CTA–2015–02) is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015–20147 Filed 8–13–15; 8:45 am]
BILLING CODE 8011–01–P
10 15
U.S.C. 78k–1(a)(1).
CFR 240.608.
12 15 U.S.C. 78k–1(a)(1)(C)(iii).
13 15 U.S.C. 78k–1.
14 17 CFR 200.30–3(a)(27).
11 17
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48941
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–75655; File No. SR–FINRA–
2015–029]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Adopt
FINRA Rule 3210 (Accounts At Other
Broker-Dealers and Financial
Institutions) in the Consolidated FINRA
Rulebook
August 10, 2015.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘Act’’
or ‘‘SEA’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on July 31, 2015, Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been substantially prepared by
FINRA. The Commission is publishing
this notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to adopt FINRA
Rule 3210 (Accounts at Other BrokerDealers and Financial Institutions) in
the Consolidated FINRA Rulebook, and
to delete NASD Rule 3050, Incorporated
NYSE Rules 407 and 407A and
Incorporated NYSE Rule Interpretations
407/01 and 407/02.
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
1 15
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Federal Register / Vol. 80, No. 157 / Friday, August 14, 2015 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
As part of the process of developing
a new consolidated rulebook
(‘‘Consolidated FINRA Rulebook’’),3
FINRA is proposing to adopt a new,
consolidated rule addressing accounts
opened or established by associated
persons of members at firms other than
the firm with which they are associated.
FINRA proposes to adopt FINRA Rule
3210 (Accounts at Other Broker-Dealers
and Financial Institutions) in the
Consolidated FINRA Rulebook and to
delete NASD Rule 3050, Incorporated
NYSE Rules 407 and 407A and
Incorporated NYSE Rule Interpretations
407/01 and 407/02.4
Sound supervisory practices require
that a member firm monitor personal
accounts opened or established outside
of the firm by its associated persons.
Proposed FINRA Rule 3210 combines
and streamlines longstanding provisions
of the NASD and NYSE rules that
address this area and would, in
combination with FINRA’s new FINRA
Rule 3110(d) governing securities
transactions review and investigation,5
help facilitate effective oversight of the
specified trading activities of associated
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 For convenience, the Incorporated NYSE Rules
are referred to as the ‘‘NYSE Rules.’’
5 New FINRA Rule 3110(d) (Transaction Review
and Investigation) sets forth requirements for
supervisory procedures for members to comply
with the Insider Trading and Securities Fraud
Enforcement Act of 1988 (‘‘ITSFEA’’) (Pub. L. 100–
704, 102 Stat. 4677). The Commission has approved
FINRA Rule 3110(d) as part of FINRA’s new
consolidated supervision rules, which became
effective on December 1, 2014. See Securities
Exchange Act Release No. 71179 (December 23,
2013), 78 FR 79542 (December 30, 2013) (Order
Granting Approval of Proposed Rule Change; File
No. SR–FINRA–2013–025) (‘‘Supervisory Rules
Filing’’); see also Regulatory Notice 14–10 (March
2014) (Consolidated Supervision Rules). Paragraph
(d)(1) of the rule requires that a member’s
supervisory procedures must include a process for
the review of securities transactions that is
reasonably designed to identify trades that may
violate the provisions of the Act, its regulations, or
FINRA rules prohibiting insider trading and
manipulative and deceptive devices that are
effected for the accounts specified under paragraphs
(d)(1)(A) through (d)(1)(D) of the rule.
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persons of member firms. FINRA sought
comment on the proposal in a
Regulatory Notice (the ‘‘Notice’’).6
FINRA has revised the proposed rule as
published in the Notice in response to
comments.7
(A) Background: NASD Rule 3050 and
NYSE Rules 407 and 407A
NASD Rule 3050 and NYSE Rules 407
and 407A are longstanding rules that
address specified accounts opened or
established by associated persons of
members at firms other than the firm
with which they are associated.
NASD Rule 3050 (designated in its
original form as Section 28 of the Rules
of Fair Practice) was adopted to address
this issue by providing a means by
which members would be informed of
the extent and nature of transactions
effected by their employees or other
associated persons,8 so that members, in
their own interest and in the interest of
their customers, might weigh the effect,
if any, of such transactions handled
outside their firms.9 The rule imposes
specified obligations on member firms
and associated persons.10 In short:
• Obligations of Member Firms:
NASD Rule 3050(a) requires that a
member (called an ‘‘executing member’’)
who knowingly executes a transaction
for the purchase or sale of a security for
the account of a person associated with
another member (called an ‘‘employer
member’’), or for any account over
which the associated person has
discretionary authority, must use
reasonable diligence to determine that
the execution of the transaction will not
adversely affect the interests of the
employer member. NASD Rule 3050(b)
requires that, where an executing
member knows that a person associated
with an employer member has or will
6 See Regulatory Notice 09–22 (April 2009)
(Personal Securities Transactions).
7 Comments are discussed in Item II.C of this
filing. As discussed further in Item II.C,
commenters expressed concern that Rule 3210, as
proposed in the Notice, would be burdensome or
difficult to implement and that the rule should,
informed by the approach of current NASD Rule
3050, be revised to permit firms flexibility to craft
appropriate supervisory policies and procedures
taking into account their business models and the
risk profiles of their activities.
8 The terms ‘‘person associated with a member’’
and ‘‘associated person of a member’’ include,
among others, registered representatives. See
paragraph (rr) of Article I of the FINRA By-Laws.
9 See Securities Exchange Act Release No. 4924
(August 21, 1953).
10 FINRA historically has noted that the purpose
of the rule (originally designated Article III, Section
28 of the Rules of Fair Practice) is to ‘‘help member
firms discharge their supervisory responsibility
over the securities activities conducted in their
associated persons’ personal securities accounts.’’
Securities Exchange Act Release No. 23754 (October
28, 1986), 51 FR 40546 (November 7, 1986)
(Proposed Rule Change; File No. SR–NASD–86–29).
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have a financial interest in, or
discretionary authority over, any
existing or proposed account carried by
the executing member, the executing
member must:
(1) Notify the employer member in
writing, prior to the execution of a
transaction for the account, of the
executing member’s intention to open or
maintain that account;
(2) Upon written request by the
employer member, transmit duplicate
copies of confirmations, statements, or
other information with respect to the
account; and
(3) Notify the person associated with
the employer member of the executing
member’s intention to provide the
notice and information required by (1)
and (2).
• Obligations of Associated Persons:
NASD Rules 3050(c) and Rule 3050(d),
in combination, address associated
persons, whether they open securities
accounts or place securities orders
through a member firm other than their
employer or whether they do so through
other types of financial services firms
that are not FINRA members.11
Specifically:
(1) NASD Rule 3050(c) requires that a
person associated with a member, prior
to opening an account or placing an
initial order for the purchase or sale of
securities with another member, must
notify both the employer member and
the executing member, in writing, of his
or her association with the other
member. The rule provides that if the
account was established prior to the
person’s association with the employer
member, the person must notify both
members in writing promptly after
becoming associated;
(2) NASD Rule 3050(d) provides that
if the associated person opens a
securities account or places an order for
the purchase or sale of securities with
a broker-dealer that is registered
pursuant to SEA Section 15(b)(11) (a
notice-registered broker-dealer), a
domestic or foreign investment adviser,
bank, or other financial institution (that
is, firms that are not FINRA members),
then he or she must: (i) Notify his or her
employer member in writing, prior to
the execution of any initial transactions,
of the intention to open the account or
place the order; and (ii) upon written
request by the employer member,
request in writing and assure that the
notice-registered broker-dealer,
investment adviser, bank, or other
financial institution provides the
11 NASD Rule 3050(e) provides that Rules 3050(c)
and (d) apply only to accounts or orders in which
an associated person has a financial interest or with
respect to which the associated person has
discretionary authority.
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employer member with duplicate copies
of confirmations, statements, or other
information concerning the account or
order. NASD Rule 3050(d) provides that
if an account subject to Rule 3050(d)
was established prior to the person’s
association with the member, the person
must comply with the rule promptly
after becoming associated;
(3) NASD Rule 3050(f) provides that
the requirements of Rule 3050 do not
apply to transactions in unit investment
trusts and variable contracts or
redeemable securities of companies
registered under the Investment
Company Act of 1940, or to accounts
which are limited to transactions in
such securities.
NYSE Rule 407, similar in purpose to
FINRA Rule 3050, addresses
transactions by and for employees of
member firms 12 as follows:
• NYSE Rule 407(a) is similar to
NASD Rule 3050(b), except that Rule
407(a) imposes a requirement to obtain
the prior written consent of the
employer member.13 Specifically, the
rule requires that no member or member
organization may, without the prior
written consent of the employer, open a
securities or commodities account or
execute any transaction in which a
member or employee associated with
another member or member
organization is directly or indirectly
interested. The rule requires that
duplicate confirmations and account
statements be sent promptly to the
employer.
• NYSE Rule 407(b) is similar to
NASD Rules 3050(c) and (d), except
that, like NYSE Rule 407(a), it also sets
forth a prior written consent
requirement. The rule requires that no
member associated with a member or
member organization may establish or
maintain any securities or commodities
account 14 or enter into any securities
transaction with respect to which such
person has any financial interest or the
power, directly or indirectly, to make
12 See note 10 supra. The NYSE noted that Rule
407 imposes obligations as to specified personal
accounts of employees and associated persons and
that one of the rule’s purposes, among other things,
is to help deter and detect violations of applicable
federal securities laws and regulations. See NYSE
Information Memo 09–50 (October 30, 2009)
(Supervision of Trading in Proprietary, Employee
and Employee-Related Securities and Commodities
Accounts).
13 The term ‘‘employer member’’ is defined
within the context of the NASD rule, not the NYSE
rule. For purposes of discussing NYSE Rule 407, in
this filing the term ‘‘employer member’’ is used
interchangeably with ‘‘employer’’ for convenience.
14 NYSE Rule 407.11 states that the term
‘‘securities or commodities accounts’’ as used in
Rule 407(b) includes, but is not limited to, limited
or general partnership interests in investment
partnerships.
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investment decisions, at another
member or member organization, or a
domestic or foreign non-member brokerdealer, investment adviser, bank, other
financial institution,15 or otherwise
without the prior written consent of
another person designated by the
member or member organization to sign
such consents and review such
accounts. The rule requires that persons
having accounts or effecting
transactions as covered by the rule must
arrange for duplicate confirmations and
statements (or their equivalents) to be
sent to a person designated by the
member or member organization to
review such accounts and transactions.
The rule further requires that all such
accounts and transactions must
periodically be reviewed by the member
or member organization employer.16
• NYSE Rule 407.12 provides that the
rule’s requirement to send duplicate
confirmations and statements does not
apply to transactions in unit investment
trusts and variable contracts or
redeemable securities of companies
registered under the Investment
Company Act of 1940, or to accounts
which are limited to transactions in
such securities, or to Monthly
Investment Plan type accounts, unless
the employer member requests receipt
of duplicate confirmations and
statements of such accounts. As such,
the provision is similar to the
corresponding provisions under NASD
Rule 3050(f), except that Rule 3050(f)
wholly excepts the specified
transactions and accounts from the
scope of Rule 3050.
In addition, NYSE Rule 407A
(Disclosure of All Member Accounts)
requires members (i.e., natural persons
approved by the New York Stock
Exchange (the ‘‘Exchange’’) and
designated by a member organization to
effect transactions on the floor of the
Exchange or any facility thereof) to
promptly report to the Exchange any
securities account, including an error
account, in which the member has,
directly or indirectly, any financial
interest or the power to make
investment decisions. Such accounts
include any account at a member or
non-member broker-dealer, investment
adviser, bank or other financial
15 NYSE Rule 407.13 states that, for purposes of
the rule, the term ‘‘other financial institution’’
includes, but is not limited to, insurance
companies, trust companies, credit unions and
investment companies.
16 NYSE Rule 407.11 requires that members and
member organizations must develop and maintain
written procedures for reviewing such accounts and
transactions and must assure that their associated
persons are not improperly recommending or
marketing such securities or products to others
through members or member organizations.
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48943
institution. NYSE Rule 407A also
requires a member having such an
account to notify the financial
institution that carries or services the
account that it is a NYSE member. In
addition, the rule requires that members
report to the Exchange when any such
securities account is closed.
NYSE Rule 407A was adopted in 2001
as part of a series of initiatives designed
to strengthen the regulation of activities
of NYSE floor brokers.17 This rule
expands the obligations placed upon
members under Rule 407 by requiring
disclosure to the Exchange. These
reporting requirements were designed to
provide the NYSE with current
information about where floor members
carry securities accounts and to enhance
its ability to investigate quickly the
trading of securities by such members.
NYSE Rule Interpretation 407/01
addresses the process for determining
whether the account of a spouse of an
associated person should be subject to
NYSE Rule 407.
NYSE Rule Interpretation 407/02
provides that NYSE Rule 407(b) applies
when an associated person is also a
majority stockholder of a non-public
corporation that wishes to open a
discretionary margin account at another
member.
(B) Proposed FINRA Rule 3210
Proposed FINRA Rule 3210,
consistent with the longstanding
purposes of NASD Rule 3050 and NYSE
Rule 407,18 is designed to enable
members to monitor the personal
accounts of their associated persons
opened or established outside of the
member firm. The new rule, in
combination with new FINRA Rule
3110, takes the approach that a member
is responsible for supervising its
associated persons’ trading activities.19
17 The Commission noted that these initiatives
would aid the NYSE in fulfilling some of the
undertakings included in the NYSE’s 1999
settlement with the SEC regarding failure to enforce
compliance with SEA Section 11(a) and SEA Rule
11a–1 and NYSE Rules 90, 95 and 111 with respect
to activity of floor brokers. As noted by the
Commission, broadly, those provisions were aimed
at preventing NYSE floor broker members from
exploiting their advantageous position on the NYSE
floor for personal gain to the detriment of the
investing public. See In the Matter of New York
Stock Exchange, Inc., Securities Exchange Act
Release No. 41574 (June 29, 1999), Administrative
Proceeding File No. 3–9925; Securities Exchange
Act Release No. 42381 (February 3, 2000), 65 FR
6673 (February 10, 2000) (Notice of Filing of
Proposed Rule Change; File No. SR–NYSE–99–25);
Securities Exchange Act Release No. 44769
(September 6, 2001), 66 FR 47710 (September 13,
2001) (Order Granting Approval to Proposed Rule
Change; File No. SR–NYSE–99–25).
18 See note 10 and note 12 supra.
19 See Supervisory Rules Filing and note 5 supra.
In this connection, as discussed further in Item
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The rule begins by setting forth a
requirement that an associated person
must obtain the prior written consent of
his or her employer when opening a
specified account at another member or
other financial institution. Specifically,
proposed FINRA Rule 3210(a) provides
that no person associated with a
member (‘‘employer member’’) shall,
without the prior written consent of the
member, open or otherwise establish at
a member other than the employer
member (‘‘executing member’’), or at
any other financial institution,20 any
account in which securities transactions
can be effected 21 and in which the
associated person has a beneficial
interest.22 Proposed FINRA Rule
3210.02 provides that, for purposes of
the rule, the associated person shall be
deemed to have a beneficial interest in
any account that is held by: (a) The
spouse of the associated person; (b) a
child of the associated person or of the
associated person’s spouse, provided
that the child resides in the same
household as or is financially
dependent upon the associated person;
II.A.1(C) below, FINRA is deleting the provision
under NASD Rule 3050(a) as to the obligation of the
executing member to use reasonable diligence with
respect to the specified transactions.
20 Based on NYSE Rule 407.13 and NASD Rule
3050(d), proposed FINRA Rule 3210.05 provides
that, for the purposes of the rule, the terms ‘‘other
financial institution’’ and ‘‘financial institution
other than a member’’ include, but are not limited
to, any broker-dealer that is registered pursuant to
SEA Section 15(b)(11), domestic or foreign nonmember broker-dealer, investment adviser, bank,
insurance company, trust company, credit union
and investment company.
21 In the interest of helping facilitate supervision
of securities transactions under new FINRA Rule
3110(d)(1), FINRA is specifying ‘‘any account in
which securities transactions can be effected’’ so as
to be clear that the proposed rule’s scope includes
any account, regardless of type, where securities
transactions can take place as specified under the
rule.
22 As proposed in the Notice, the rule would have
specified accounts in which the associated person
has a ‘‘personal financial interest.’’ Commenters
suggested that this language was unclear. See Item
II.C.2 of this filing. FINRA is proposing the term
‘‘beneficial interest’’ because that term is an
established and well-understood standard. See, e.g.,
FINRA Rule 5130(i)(1), which defines ‘‘beneficial
interest’’ to mean, in part, any economic interest,
such as the right to share in gains or losses. FINRA
believes that the proposed term is consistent with
the purpose of NYSE Rule 407, which in part
addresses transactions in which the associated
person is ‘‘directly or indirectly interested’’ (NYSE
Rule 407(a)) or with respect to which the associated
person ‘‘has any financial interest’’ (NYSE Rule
407(b)) and with NASD Rules 3050(b) through (d),
which in part address accounts or transactions in
which the associated person has a ‘‘financial
interest.’’ Further, the proposed term would align
the rule with ‘‘beneficial interest’’ as specified
under new FINRA Rule 3110(d)(1)(B), which, for
purposes of the transaction review and
investigation provisions set forth under new FINRA
Rule 3110(d)(1), specifies in part accounts ‘‘in
which a person associated with the member has a
beneficial interest.’’ See note 5 supra.
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18:50 Aug 13, 2015
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(c) any other related individual over
whose account the associated person
has control; or (d) any other individual
over whose account the associated
person has control and to whose
financial support the associated person
materially contributes.23 The types of
accounts specified pursuant to proposed
FINRA Rule 3210.02 are designed to
align with ‘‘covered accounts’’ as
defined pursuant to new FINRA Rule
3110(d)(4)(A) for purposes of the
transaction review and investigation
provisions pursuant to Rule
3110(d)(1).24 Further, FINRA believes
the proposed language is consistent
with the broad approach of NASD Rule
3050 and NYSE Rule 407 as historically
understood to facilitate the monitoring
of associated persons’ personal and
related accounts.25 FINRA notes that the
proposed new language eliminates the
language in the current rules that
references accounts or transactions
where the associated person has ‘‘the
power, directly or indirectly, to make
investment decisions,’’ as set forth in
NYSE Rule 407(b), and accounts where
the associated person has ‘‘discretionary
authority,’’ as set forth in NASD Rule
3050(b).26
23 Some commenters expressed concerns as to
addressing spouse accounts in the proposed rule.
FINRA notes that spouse accounts have long been
addressed under NYSE Rule Interpretation 407/01.
See Item II.C.2 of this filing.
24 See note 5 supra.
25 For example, with respect to the approach of
the current rules, as noted earlier, NYSE Rule
Interpretation 407/01 addresses spouse accounts. In
the context of amendments to NASD Rule 3050
(then designated Article III, Section 28 of the Rules
of Fair Practice) adopted in 1983 that extended the
rule to include accounts over which the associated
person exercises discretion, FINRA noted its intent
to enable the rule’s scope to reach accounts of
relatives of associated persons where the associated
person places the orders. See Securities Exchange
Act Release No. 19347 (December 16, 1982), 47 FR
58416 (December 30, 1982) (Proposed Rule Change;
File No. SR–NASD–82–25); Securities Exchange Act
Release No. 19550 (February 28, 1983), 48 FR 9413
(March 4, 1983) (Order Approving Proposed Rule
Change; File No. SR–NASD–82–25). FINRA believes
that because the proposed rule specifies, in
language that aligns with new FINRA Rule
3110(d)(4)(A), the types of personal relationships
that would be within the scope of ‘‘beneficial
interest,’’ the rule’s precise parameters should be
more clear.
26 FINRA believes that this will serve to more
clearly demarcate the respective scope of the new
`
rule vis-a-vis current NASD Rule 3040, which
addresses the obligations of associated persons and
members in connection with private securities
transactions. NASD Rule 3040(e)(1) defines private
securities transactions to include, in part, ‘‘any
securities transaction outside the regular course or
scope of an associated person’s employment with
a member’’ and excludes from the rule’s specified
notification requirements, among other things,
transactions subject to the notification requirements
of NASD Rule 3050. FINRA believes that, to the
extent associated persons make investment
decisions or have discretionary authority in
contexts that involve private securities transactions
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Sfmt 4703
Similar to the current rules, the new
rule places notification obligations on
associated persons with respect to the
executing member or other financial
institution. Specifically, proposed
FINRA Rule 3210(b) is based in large
part on NASD Rules 3050(c) and
3050(d) and provides that any
associated person, prior to opening or
otherwise establishing an account
subject to the rule, must notify in
writing the executing member, or other
financial institution, of his or her
association with the employer member.
Also similar to the current rules, the
new rule specifies obligations for
executing members. Specifically,
proposed FINRA Rule 3210(c) is based
in large part on NASD Rule 3050(b)(2)
and provides that an executing member
must, upon written request by the
employer member, transmit duplicate
copies of confirmations and statements,
or the transactional data contained
therein, with respect to an account
subject to the rule.27
Similar to current provisions in NASD
Rules 3050(c) and 3050(d), the proposed
rule makes allowance for accounts
opened by an associated person prior to
his or her association with the employer
member. Specifically, proposed FINRA
Rule 3210.01 provides that, if the
account was opened or otherwise
established prior to the person’s
association with the employer member,
the associated person, within 30
calendar days of becoming so
associated, must obtain the written
consent of the employer member to
maintain the account and must notify in
writing the executing member or other
financial institution of his or her
within the scope of NASD Rule 3040, as opposed
to accounts in which they have a beneficial interest
as specified by the new rule, such transactions are
properly addressed by the requirements set forth in
Rule 3040 and other FINRA rules as applicable.
FINRA believes that this approach is consistent, as
noted earlier, with the historical approach of NASD
Rule 3050 and NYSE Rule 407 that is intended to
facilitate monitoring of associated persons’ personal
and related accounts.
27 As published in the Notice, the proposed rule
would have required the employer member to
instruct the associated person to have the executing
member provide the specified duplicate account
statements and confirmations to the employer
member. As discussed further in Item II.C.1 of this
filing, commenters expressed concern that the rule
as proposed in the Notice would burden members
with collecting the specified information without
regard to whether such collection is warranted by
the member’s business model and risk profile. In
response to commenter suggestion, FINRA has
revised the proposed rule so that the specified
information is provided upon written request by the
employer member, which is consistent with the
approach of current NASD Rule 3050 and which
FINRA believes permits members flexibility to craft
appropriate supervisory policies and procedures
according to their business model and the risk
profile of their activities.
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association with the employer
member.28
Similar to the current rules, the new
rule makes allowance for specified
information that executing members
need not transmit to employer members.
Specifically, proposed FINRA Rule
3210.03 is based in large part on NYSE
Rule 407.12 and NASD Rule 3050(f) and
provides that the requirement (pursuant
to paragraph (c) of Rule 3210) that the
executing member provide the employer
member, upon the employer member’s
written request, with duplicate account
confirmations and statements, or the
transactional data contained therein,
shall not be applicable to transactions in
unit investment trusts, municipal fund
securities as defined under MSRB Rule
D–12,29 qualified tuition programs
pursuant to Section 529 of the Internal
Revenue Code and variable contracts or
redeemable securities of companies
registered under the Investment
Company Act, as amended, or to
accounts that are limited to transactions
in such securities, or to Monthly
Investment Plan type accounts.30
Proposed FINRA Rule 3210.04 is new
and provides that, with respect to an
account subject to the rule at a financial
institution other than a member, the
employer member must consider the
extent to which it will be able to obtain,
upon written request, duplicate copies
of confirmations and statements, or the
transactional data contained therein,
directly from the non-member financial
institution in determining whether to
provide its written consent to an
28 As published in the Notice, the proposed rule
would have specified 15 business days. In response
to comment, the proposed rule as revised specifies
30 calendar days so as to reduce burdens on
member firms and their associated persons. See
Item II.C.3 of this filing.
29 MSRB Rule D–12 defines municipal fund
security to mean ‘‘a municipal security issued by
an issuer that, but for the application of Section 2(b)
of the Investment Company Act of 1940, would
constitute an investment company within the
meaning of Section 3 of the Investment Company
Act of 1940.’’
30 The approach to the referenced types of
transactions reflects a longstanding intention under
the NASD and NYSE rule that members not be
burdened with information collection for
transactions that pose limited risk from the
standpoint of the rule’s supervisory purposes. See,
e.g., Securities Exchange Act Release No. 19347
(December 16, 1982), 47 FR 58416 (December 30,
1982) (Proposed Rule Change; File No. SR–NASD–
82–25). As discussed further in Item II.C.5 of this
filing, the proposed requirement is largely as
published in the Notice. In response to commenter
suggestion, FINRA has added municipal fund
securities as defined under MSRB Rule D–12 and
Section 529 plans to the transactions set forth under
the rule. FINRA is adding these transactions
because FINRA believes these types of products are
reasonably classed with the types of transactions
specified under the current rule in posing limited
risk from the standpoint of the rule’s supervisory
purposes.
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associated person to open or maintain
such account.31 FINRA believes that the
proposed requirement serves a valid
regulatory purpose in view of the
employer member’s responsibility for
supervising its associated persons’
trading activities.
(C) Deleted Requirements
Proposed FINRA Rule 3210 deletes a
number of requirements in NASD Rule
3050 and NYSE Rule 407 that are
rendered outdated by the new rule or
are otherwise addressed elsewhere by
FINRA rules.
• The proposed rule eliminates NASD
Rule 3050(a)’s requirement that the
executing member use reasonable
diligence to determine that the
execution of the transaction will not
‘‘adversely affect the interests of the
employer member.’’ FINRA proposes to
delete this requirement because FINRA
believes that it is appropriate for the
new rule, in combination with new
FINRA Rule 3110,32 to take the
approach that the employer member is
responsible for supervising its
associated persons’ trading activities.33
• FINRA proposes to delete the
account review requirements set forth in
NYSE Rule 407(b) and the requirements
for written procedures set forth in NYSE
Rule 407.11 because these issues are
addressed by the proposed rule in
combination with FINRA’s new
supervisory rules, in particular new
FINRA Rule 3110(d), which sets forth
the new supervisory framework for
securities transactions review and
investigation.34
• As noted earlier, NYSE Rule 407A
was intended to address activities of
NYSE floor brokers. FINRA proposes to
delete NYSE Rule 407A in its entirety
from the Transitional Rulebook because
proposed FINRA Rule 3210 requires
disclosure at the member firm level of
the same types of information that Rule
407A requires with respect to the NYSE
as to floor brokers. FINRA believes it is
more appropriate to require member
firms to obtain the required information
31 As published in the Notice, the proposed rule
would have required the associated person to
provide an instruction to the non-member financial
institution to provide the specified information to
the employer member. As discussed further in Item
II.C.1 of this filing, FINRA believes that the
requirement as revised permits members flexibility
to craft appropriate supervisory policies and
procedures in determining whether to provide
written consent as to the specified accounts at nonmember financial institutions.
32 See Supervisory Rules Filing.
33 FINRA notes that, notwithstanding this
approach, the rule retains the longstanding duty of
the executing member to assist the employer
member by providing the specified information
upon request.
34 See note 5 supra and Supervisory Rules Filing.
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48945
and to supervise the accounts of their
associated persons for improper trading,
rather than requiring that such
information be sent directly to FINRA.
Moreover, as noted above, these
reporting requirements were designed to
provide the NYSE with current
information about where floor members
carry securities accounts and to enhance
its ability to investigate quickly the
trading of securities by such members.
• FINRA proposes to delete NYSE
Rule Interpretation 407/01 because it
would be superseded by proposed
FINRA Rule 3210.02, which as noted
earlier expressly provides, among other
things, that an associated person is
deemed to have a beneficial interest in
any account that is held by the spouse
of the associated person.
• FINRA proposes to delete NYSE
Rule Interpretation 407/02 because it is
rendered redundant by new FINRA Rule
3210(a), the scope of which by its terms
reaches accounts as specified by the rule
in which the associated person has a
beneficial interest.
• FINRA proposes to delete language
referring to accounts or transactions
where the associated person has ‘‘the
power, directly or indirectly, to make
investment decisions,’’ as set forth in
NYSE Rule 407(b), and accounts where
the associated person has ‘‘discretionary
authority,’’ as set forth in NASD Rule
3050(b). As discussed above, FINRA
believes that, to the extent associated
persons make investment decisions or
have discretionary authority in contexts
that involve private securities
transactions within the scope of NASD
Rule 3040, as opposed to accounts in
which they have a beneficial interest,
such transactions are properly
addressed by the requirements set forth
in Rule 3040 and other FINRA rules as
applicable.35
If the Commission approves the
proposed rule change, 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 365 days following Commission
approval.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,36 which
requires, among other things, that
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
35 See
36 15
E:\FR\FM\14AUN1.SGM
note 26 supra.
U.S.C. 78o–3(b)(6).
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equitable principles of trade, and, in
general, to protect investors and the
public interest. FINRA believes that the
proposed rule change will further the
purposes of the Act because, as part of
the FINRA rulebook consolidation
process, the proposed rule change will
help to protect investors and the public
interest by streamlining and
reorganizing existing rules that promote
effective oversight of accounts opened
or established by associated persons of
members at firms other than the firm
with which they are associated. By
setting forth the requirements pursuant
to which associated persons will seek
the prior written consent of the
employer member to open or otherwise
establish accounts as specified under
the rule, and pursuant to which the
specified information will be
transmitted to the employer member
upon the employer member’s request,
the proposed rule will facilitate the
supervision of the trading activities of
associated persons within the
framework of FINRA’s new supervisory
rules as approved by the Commission.
The proposed rule will also help
members ensure that such activities,
engaged in at executing members or
other financial institutions, do not
violate provisions of the Act, its
regulations, or FINRA rules, thereby
helping to ensure orderly markets.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
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. Commenters
expressed concern that the proposed
rule change, as originally published in
Regulatory Notice 09–22, would have
been burdensome to implement and
would have resulted in employer
members being required to request
information from executing members
and non-member financial institutions
bearing little or no relationship to the
scope and nature of the employer
member’s activities. In response to
commenter suggestion, FINRA revised
the proposed rule so as to permit
members discretion, consistent with
their supervisory obligations under new
FINRA Rule 3110(d), to request the
specified information of executing
members and non-member financial
institutions, thereby permitting
members reasonable flexibility to craft
appropriate supervisory policies and
procedures according to their business
model and the risk profile of their
activities. The proposed rule change as
revised is thereby consistent with the
approach of current NASD Rule 3050,
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which commenter suggestion supported.
FINRA believes that because the
proposed rule change, as revised, is
consistent with current requirements
and longstanding practice, it will not
impose additional burdens on members.
The proposed rule change permits
members to implement supervisory
procedures that align with their
business models, without diminishing
members’ supervisory obligations with
respect to the activities of their
associated persons. FINRA believes that
this proposed approach imposes less
cost on members without reducing
investor protections. In addition, the
proposed rule change deletes a number
of requirements in NASD Rule 3050 and
NYSE Rule 407 that are rendered
outdated by the proposed new rule or
are otherwise addressed elsewhere by
other FINRA rules, which further
minimizes the potential compliance
burden on members in light of the
objectives of the proposed rule change.
FINRA recognizes that providing such
flexibility to members may require
increased monitoring of members’
compliance with this rule as part of
FINRA’s examination program.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The proposed rule change was
published for comment in Regulatory
Notice 09–22 (April 2009). A copy of the
Notice is attached as Exhibit 2a. Thirtythree commenters responded to the
Notice, and a list of the commenters is
attached as Exhibit 2b.37 Copies of the
comment letters received in response to
the Notice are attached as Exhibit 2c.
1. Core Proposed Rule Requirements:
Obligation To Provide Duplicate
Account Statements and Confirmations
As published in the Notice, proposed
FINRA Rule 3210(a) in part would have
required an employer member, as a
condition to giving prior written
consent for opening or establishing an
account pursuant to the rule, to instruct
the associated person to have the
executing member provide duplicate
account statements and confirmations to
the employer member. Paragraph (b) set
forth requirements pertaining to the
associated person’s obligation to notify
the executing member or other financial
institution in writing of his or her
association with the employer member.
Paragraph (c) of the rule would have
provided in part that the executing
member must promptly obtain and
37 All references to commenters under this Item
are to the commenters as listed in Exhibit 2b.
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implement an instruction from the
associated person directing that
duplicate account statements and
confirmations be provided to the
employer member. (With respect to
accounts opened at a financial
institution other than a member,
proposed FINRA Rule 3210.02 as
published in the Notice would have
required the associated person to
provide the instruction to the financial
institution.)
Commenters generally expressed
concern that, as published in the Notice,
the requirements of proposed Rules
3210(a), (b) and (c) and 3210.02, singly
or in combination, are unnecessary for
regulatory purposes, are burdensome or
difficult for firms to implement, or the
rule should be designed to permit
members the discretion to determine
whether, based on their business model
and the risk profile of their activities,
they need to require duplicate account
statements and confirmations to carry
out their supervisory responsibilities.38
Some of these commenters suggested
that involving the associated person in
the process of requesting the required
`
data vis-a-vis the executing member
creates supervisory risks.39 A number
suggested that it is better practice and
more efficient to have the employer
member obtain the required data
directly from the executing member or
non-member institution.40 A few of the
commenters raised concerns about
potential difficulties in obtaining the
required information from non-members
(including foreign non-members).41
Many questioned the supervisory and
regulatory value of requiring firms to
collect data pertaining to associated
person accounts and transactions
bearing little or no relationship to the
scope and nature of their firms’
activities.42 Some suggested that current
NASD Rule 3050 generally permits
members to exercise such discretion and
that retaining the approach of the NASD
rule would be conducive to more
efficient use of regulatory or supervisory
resources.43
In response, FINRA agrees that the
proposal as published in the Notice
raises issues with respect to the efficient
use and conservation of regulatory and
38 ACLI, CAI, Channel Capital, Charles Schwab,
Farmers Financial, FSI, GWFS, Hillard, IBSI, ICI,
MWA, NAIBD, National Planning, NMIS, NSCP,
PFSI, PSI, Quasar, SIFMA, State Farm, SunTrust,
Sykes, UBS, WFA and Witthaut.
39 National Planning, PSI, SIFMA and UBS.
40 Charles Schwab, FSI, NMIS, SIFMA and UBS.
41 Charles Schwab, SIFMA and UBS.
42 ACLI, CAI, Farmers Financial, GWFS, Hillard,
ICI, MWA, National Planning, Quasar, State Farm,
SunTrust, Sykes and Witthaut.
43 CAI, Charles Schwab, Farmers Financial, FSI,
National Planning, PFSI and SunTrust.
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supervisory resources, as well as to
implementation. FINRA has revised
proposed FINRA Rule 3210, consistent
with NASD Rule 3050, to provide that
an executing member must, upon
written request by an employer member,
transmit the duplicate copies of
confirmations and statements, or the
transactional data contained therein.44
With respect to accounts at a financial
institution other than a member, FINRA
has revised the rule to provide that the
employer member must consider the
extent to which it will be able to obtain,
upon written request, duplicate copies
of confirmations and statements, or the
transactional data contained therein,
directly from the institution in
determining whether to provide its
written consent to an associated person
to open or maintain an account subject
to the rule.45 FINRA believes that this
approach, based in large part on the
longstanding approach of NASD Rule
3050, should provide members
reasonable flexibility to craft
appropriate supervisory policies and
procedures according to their business
model and the risk profile of their
activities. FINRA reminds members
that, in permitting such flexibility, the
rule in no way lessens members’
supervisory obligations under FINRA
rules with respect to the activities of
their associated persons.46
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2. Personal Financial Interest of the
Associated Person
As published in the Notice, the
accounts covered by proposed FINRA
Rule 3210 would have reached in part
those in which the associated person
has a ‘‘personal financial interest.’’ The
Notice stated that ‘‘personal financial
interest’’ would as a general matter
extend to a spouse’s account.
Commenters expressed concern as to the
scope and meaning of the term
‘‘personal financial interest’’ and
requested that FINRA further define the
term, limit its scope, or otherwise
provide more specific guidance.47
Several commenters suggested generally
that it would be more effective for the
rule to speak to accounts with respect to
which the associated person exercises
control or authority, rather than having
a ‘‘personal financial interest.’’ 48
In response, FINRA is proposing a
standard that is consistent with the
purpose of NASD Rule 3050 and NYSE
44 See
proposed FINRA Rule 3210(c).
proposed FINRA Rule 3210.04.
46 See note 5 supra and Supervisory Rules Filing.
47 CAI, Charles Schwab, Farmers Financial, IBSI,
ICI, NAIBD, NMIS, NPB, NSCP and SIFMA.
48 Charles Schwab, Farmers Financial, FSI, NMIS
and SIFMA.
45 See
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Rule 407 49 while also aligning more
clearly with new FINRA Rule 3110(d).
Specifically, FINRA has revised the
proposed rule to extend to specified
accounts in which the associated person
has a beneficial interest. As discussed
earlier, FINRA believes the term
‘‘beneficial interest’’ is appropriate
because that term is an established and
well-understood standard 50 and is
consistent with the terms ‘‘directly or
indirectly interested,’’ as used in NYSE
Rule 407(a), ‘‘has any financial
interest,’’ as used in NYSE Rule 407(b),
and accounts or transactions in which
the associated person has a ‘‘financial
interest,’’ as applicable under NASD
Rules 3050(b) through (d). Further, the
proposed term would align the rule with
‘‘beneficial interest’’ as specified under
new FINRA Rule 3110(d)(1)(B), which,
for purposes of the transaction review
and investigation provisions set forth
under new FINRA Rule 3110(d)(1),
specifies in part accounts ‘‘in which a
person associated with the member has
a beneficial interest.’’ 51 In addition,
FINRA is proposing, as Supplementary
Material .02 to the rule, to provide that
the associated person shall be deemed
to have a beneficial interest in any
account that is held by: (a) The spouse
of the associated person; (b) a child of
the associated person or of the
associated person’s spouse, provided
that the child resides in the same
household as or is financially
dependent upon the associated person;
(c) any other related individual over
whose account the associated person
has control; or (d) any other individual
over whose account the associated
person has control and to whose
financial support the associated person
materially contributes. As noted earlier,
this proposed language is designed to
align with ‘‘covered accounts’’ as
defined pursuant to new FINRA Rule
3110(d)(4)(A) for purposes of the
transaction review and investigation
provisions pursuant to Rule
3110(d)(1).52
49 See
note 10 and note 12 supra.
Rule 5130(i)(1) defines ‘‘beneficial
interest’’ to mean, in part, any economic interest,
such as the right to share in gains or losses. See note
22 supra.
51 See note 5 supra.
52 See proposed FINRA Rule 3210.02. Some
commenters questioned whether it is legally viable
for the proposed rule to reach spouse accounts. See
Charles Schwab and NPB. In response, FINRA notes
that spouse accounts have long been addressed
under NYSE Rule Interpretation 407/01. Further,
FINRA notes that the rule addresses such accounts
as a supervisory matter under FINRA rules for
purposes of investor protection and market
integrity. See also note 5 supra and new FINRA
Rule 3110(d).
50 FINRA
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48947
3. Accounts Opened Prior to
Association With the Employer Member
As published in the Notice, proposed
FINRA Rule 3210.01 would have
required that if the associated person’s
account was opened or otherwise
established prior to his or her
association with the employer member,
the associated person would be required
to obtain the employer member’s
written consent to maintain the account
within 15 business days of becoming so
associated. Commenters suggested that
the 15-business-day requirement is too
short or restrictive and that the rule
should require ‘‘prompt’’ notification by
the associated person, as under current
NASD Rule 3050, or permit a longer
specified period.53 One commenter
believed that the rule should not cover
previously opened accounts at all.54
In response, FINRA notes that it
serves a valid regulatory purpose that
the proposed rule should extend to
accounts opened prior to the associated
person’s association with the employer
member, given that the associated
person would have the ability to effect
transactions in such accounts. FINRA
believes that it is reasonable, from the
standpoint of reducing burdens on
member firms and their associated
persons, to permit a longer amount of
time for notification with respect to
already-opened accounts and has
accordingly revised the rule to permit
30 calendar days.55
4. Revocation of Consent To Maintain
the Account
As published in the Notice, proposed
FINRA Rule 3210.04 would have
created a new requirement providing
that if the employer member does not
receive the associated person’s
duplicate statements and confirmations
in a timely manner, the employer
member would be required to revoke its
consent to maintaining the account and
would be required to so notify the
executing member or other financial
institution in writing. The rule would
have required the employer member to
promptly obtain records from the
executing member that the account was
closed.
Commenters generally expressed
concern that the proposed requirement
is burdensome, poses various
difficulties as to implementation, or that
FINRA should provide guidance as to
how accounts should be closed
53 ACLI, CAI, Charles Schwab, FSI, National
Planning, NMIS, NSCP, SIFMA and WFA.
54 Fischer.
55 See proposed FINRA Rule 3210.01.
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pursuant to the rule.56 In response,
FINRA has reconsidered the proposed
requirement and agrees that it is not
necessary, from the standpoint of the
rule’s regulatory purpose, to prescribe
how employer members should respond
to the delayed receipt, or non-receipt, of
duplicate copies of confirmations,
statements or the transactional data
contained therein. First, FINRA believes
that if an employer member determines,
pursuant to the rule, to request such
information and does not receive it in a
timely fashion, then as a matter of
sound supervisory practice the
employer member should have in place
policies and procedures to address the
issue.57 Second, FINRA notes that the
proposed rule as revised requires
executing members, upon written
request by an employer member, to
transmit the duplicate copies of
confirmations and statements, or the
transactional data contained therein.58
Finally, FINRA takes note that many
commenters requested that FINRA Rule
3210 be designed to permit firms
flexibility based upon their business
model and the risk profile of their
activities.59 As such, FINRA believes it
is appropriate that employer members
determine for themselves what would
constitute timely receipt of the
information required pursuant to the
rule, provided such determination is
reasonable within the context of their
overall supervisory obligations.
Accordingly, FINRA has deleted the
requirement from the proposed rule as
revised.
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5. Transactions and Accounts Not
Subject to Transmission Requirement
As published in the Notice, proposed
FINRA Rule 3210.03 would have
provided that the requirement to
provide to the employer member
duplicate account statements and
confirmations is not applicable to
transactions in unit investment trusts
and variable contracts or redeemable
securities of companies registered under
the Investment Company Act, as
amended, or to accounts that are limited
to transactions in such securities, or to
56 CAI, Charles Schwab, FSI, ICI, J.A. Glynn,
National Planning, NSCP, Pagemill, SIFMA, UBS
and WFA.
57 FINRA notes that, with respect to accounts at
non-member financial institutions, the proposed
rule as revised provides that the employer must
consider the extent to which it will be able to
obtain, upon written request, duplicate copies of
confirmations and statements, or the transactional
data contained therein, directly from the nonmember financial institution in determining
whether to provide its written consent to an
associated person to open or maintain such an
account.
58 See proposed FINRA Rule 3210(c).
59 See, e.g., Item II.C.1 of this filing.
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Monthly Investment Plan type accounts,
unless the employer member requests
receipt of such duplicate account
statements and confirmations.
Commenters suggested that, because
they believe the referenced types of
transactions and accounts pose little in
the way of supervisory risk, they should
be exempted from the proposed rule’s
requirements altogether, similar to the
provisions under current NASD Rule
3050(f), or that the proposed rule should
expand and update types of transactions
and accounts that would be exempted
from the rule.60
FINRA appreciates members’ concern
that the new rule should adhere closely
to the current NASD requirement.
However, FINRA believes that the
proposed approach, similar to that
reflected in NYSE Rule 407.12, serves a
valid regulatory and supervisory
purpose, specifically, that the associated
person must obtain the employer
member’s prior written consent with
respect to the referenced transactions
and accounts, in the manner and to the
extent required by the proposed rule.
Accordingly, FINRA is proposing
FINRA Rule 3210.03 largely as
published in the Notice. Some
commenters made specific suggestions
as to the types of transactions and
accounts that should be excluded from
the requirement that the executing
member provide duplicate account
confirmations and statements to the
employer member upon the employer
member’s written request.61 In response,
FINRA has added municipal fund
securities as defined under MSRB Rule
D–12 and qualified Section 529 plans to
the referenced types of transactions, as
FINRA believes that, of the suggestions
proffered, these are similar to the types
of transactions specified under current
NASD Rule 3050(f) and NYSE Rule
407.12 in posing limited risk from the
standpoint of the rule’s supervisory
purposes. Accordingly, proposed FINRA
Rule 3210.03 as revised provides that
the requirement (pursuant to paragraph
(c) of the proposed rule) that the
executing member provide the employer
member, upon the employer member’s
written request, with duplicate account
confirmations and statements, or the
transactional data contained therein,
shall not be applicable to transactions in
unit investment trusts, municipal fund
60 ACLI, CAI, Charles Schwab, FSI, Hillard,
National Planning, NMIS, NPB, Pacific Select,
SIFMA and UBS.
61 Four commenters specifically suggested
qualified Section 529 plans under the Internal
Revenue Code. See CAI, FSI, NMIS and SIFMA.
One suggested all municipal fund securities. See
FSI. One suggested in addition ETFs and registered
insurance products. See CAI.
PO 00000
Frm 00145
Fmt 4703
Sfmt 4703
securities as defined under MSRB Rule
D–12, qualified tuition programs
pursuant to Section 529 of the Internal
Revenue Code and variable contracts or
redeemable securities of companies
registered under the Investment
Company Act, as amended, or to
accounts that are limited to transactions
in such securities, or to Monthly
Investment Plan type accounts.
6. Information Gathering, Processes and
Controls
The Notice requested comment on the
methodologies that members employ to
obtain information pursuant to NASD
Rule 3050 and NYSE Rule 407 and the
processes and controls that members
implement upon receipt of the required
information.
Commenters suggested the rule
should not impose requirements as to
the methodologies that members must
use (e.g., receiving the information
electronically versus in hard copy) or
otherwise limit flexibility as to receiving
and handling the information.62 One
commenter suggested FINRA should
encourage firms to use a consistent
electronic format in transmitting the
information.63 One suggested the
proposed rule should state that the
information can be received in
electronic format.64 One requested that
FINRA specify in the rule a retention
period for information received
pursuant to the rule.65
In response to comments, FINRA has
determined not to specify in the
proposed rule any particular
methodology. To this end, FINRA has
revised proposed FINRA Rule 3210(c) to
provide for transmission of ‘‘duplicate
copies of confirmations and statements,
or the transactional data contained
therein.’’ FINRA does not propose to
specify in the rule a particular retention
period because such concerns are
adequately addressed elsewhere under
SEA Rule 17a–4 and FINRA Rule 4511
as appropriate.
7. Implementation Period
Several commenters suggested that
FINRA should permit an extended
period for implementation of the
proposed rule once approved.66 In
response, in establishing an
implementation date, FINRA will take
into account that firms would need to
modify their compliance systems to
reflect the new rule’s requirements. As
stated earlier in this filing, FINRA will
62 FSI, H & L Equities, ICI, Investors Security,
NAIBD, NPB, NSCP, Pagemill, PSI and Taurus.
63 Pacific Select.
64 FSI.
65 H & L Equities.
66 ACLI, CAI, FSI and SIFMA.
E:\FR\FM\14AUN1.SGM
14AUN1
Federal Register / Vol. 80, No. 157 / Friday, August 14, 2015 / Notices
announce such implementation date in
a Regulatory Notice.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. 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:
asabaliauskas on DSK5VPTVN1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2015–029 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Robert W. Errett, Deputy Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–FINRA–2015–029. This file
number should be included on the
subject line if email 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 (https://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.,
VerDate Sep<11>2014
18:50 Aug 13, 2015
Jkt 235001
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 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–
2015–029 and should be submitted on
or before September 4, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.67
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–20006 Filed 8–13–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Proposed Collection; Comment
Request
Upon Written Request, Copies Available
From: U.S. Securities and Exchange
Commission, Office of FOIA Services,
Washington, DC 20549–2736.
Extension:
Rules 3a68–2 and 3a68–4(c);
SEC File No. 270–641, OMB Control No.
3235–0685.
Notice is hereby given that pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission (‘‘SEC’’) is
soliciting comments on the existing
collection of information provided for
Rules 3a68–2 and 3a68–4(c). The SEC
plans to submit this existing collection
of information to the Office of
Management and Budget (‘‘OMB’’) for
extension and approval.
Rule 3a68–2 creates a process for
interested persons to request a joint
interpretation by the SEC and the
Commodity Futures Trading
Commission (‘‘CFTC’’) (together with
the SEC, the ‘‘Commissions’’) regarding
whether a particular instrument (or
class of instruments) is a swap, a
security-based swap, or both (i.e., a
mixed swap). Under Rule 3a68–2, a
person provides to the Commissions a
copy of all material information
regarding the terms of, and a statement
of the economic characteristics and
purpose of, each relevant agreement,
contract, or transaction (or class
thereof), along with that person’s
determination as to whether each such
67 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00146
Fmt 4703
Sfmt 4703
48949
agreement, contract, or transaction (or
class thereof) should be characterized as
a swap, security-based swap, or both
(i.e., a mixed swap). The Commissions
also may request the submitting person
to provide additional information.
The SEC expects 25 requests pursuant
to Rule 3a68–2 per year. The SEC
estimates the total paperwork burden
associated with preparing and
submitting each request would be 20
hours to retrieve, review, and submit the
information associated with the
submission. This 20 hour burden is
divided between the SEC and the CFTC,
with 10 hours per response regarding
reporting to the SEC and 10 hours of
response regarding third party
disclosure to the CFTC.1 The SEC
estimates this would result in an
aggregate annual burden of 500 hours
(25 requests × 20 hours/request).
The SEC estimates that the total costs
resulting from a submission under Rule
3a68–2 would be approximately $12,000
for outside attorneys to retrieve, review,
and submit the information associated
with the submission. The SEC estimates
this would result in aggregate costs each
year of $300,000 (25 requests × 30
hours/request × $400).
Rule 3a68–4(c) establishes a process
for persons to request that the
Commissions issue a joint order
permitting such persons (and any other
person or persons that subsequently
lists, trades, or clears that class of mixed
swap) to comply, as to parallel
provisions only, with specified parallel
provisions of either the Commodity
Exchange Act (‘‘CEA’’) or the Securities
Exchange Act of 1934 (‘‘Exchange Act’’),
and related rules and regulations
(collectively ‘‘specified parallel
provisions’’), instead of being required
to comply with parallel provisions of
both the CEA and the Exchange Act.
The SEC expects ten requests
pursuant to Rule 3a68–4(c) per year.
The SEC estimates that nine of these
requests will have also been made in a
request for a joint interpretation
pursuant to Rule 3a68–2, and one will
not have been. The SEC estimates the
total burden for the one request for
which the joint interpretation pursuant
to 3a68–2 was not requested would be
30 hours, and the total burden
associated with the other nine requests
would be 20 hours per request because
some of the information required to be
submitted pursuant to Rule 3a68–4(c)
would have already been submitted
pursuant to Rule 3a68–2. The burden in
both cases is evenly divided between
the SEC and the CFTC.
1 The burdens imposed by the CFTC are included
in this collection of information.
E:\FR\FM\14AUN1.SGM
14AUN1
]]>Agencies
[Federal Register Volume 80, Number 157 (Friday, August 14, 2015)]
[Notices]
[Pages 48941-48949]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-20006]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-75655; File No. SR-FINRA-2015-029]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt
FINRA Rule 3210 (Accounts At Other Broker-Dealers and Financial
Institutions) in the Consolidated FINRA Rulebook
August 10, 2015.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``SEA'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on July 31, 2015, Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been substantially
prepared by FINRA. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to adopt FINRA Rule 3210 (Accounts at Other
Broker-Dealers and Financial Institutions) in the Consolidated FINRA
Rulebook, and to delete NASD Rule 3050, Incorporated NYSE Rules 407 and
407A and Incorporated NYSE Rule Interpretations 407/01 and 407/02.
The text of the proposed rule change is available on FINRA's Web
site at https://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
[[Page 48942]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
As part of the process of developing a new consolidated rulebook
(``Consolidated FINRA Rulebook''),\3\ FINRA is proposing to adopt a
new, consolidated rule addressing accounts opened or established by
associated persons of members at firms other than the firm with which
they are associated. FINRA proposes to adopt FINRA Rule 3210 (Accounts
at Other Broker-Dealers and Financial Institutions) in the Consolidated
FINRA Rulebook and to delete NASD Rule 3050, Incorporated NYSE Rules
407 and 407A and Incorporated NYSE Rule Interpretations 407/01 and 407/
02.\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\ For convenience, the Incorporated NYSE Rules are referred to
as the ``NYSE Rules.''
---------------------------------------------------------------------------
Sound supervisory practices require that a member firm monitor
personal accounts opened or established outside of the firm by its
associated persons. Proposed FINRA Rule 3210 combines and streamlines
longstanding provisions of the NASD and NYSE rules that address this
area and would, in combination with FINRA's new FINRA Rule 3110(d)
governing securities transactions review and investigation,\5\ help
facilitate effective oversight of the specified trading activities of
associated persons of member firms. FINRA sought comment on the
proposal in a Regulatory Notice (the ``Notice'').\6\ FINRA has revised
the proposed rule as published in the Notice in response to
comments.\7\
---------------------------------------------------------------------------
\5\ New FINRA Rule 3110(d) (Transaction Review and
Investigation) sets forth requirements for supervisory procedures
for members to comply with the Insider Trading and Securities Fraud
Enforcement Act of 1988 (``ITSFEA'') (Pub. L. 100-704, 102 Stat.
4677). The Commission has approved FINRA Rule 3110(d) as part of
FINRA's new consolidated supervision rules, which became effective
on December 1, 2014. See Securities Exchange Act Release No. 71179
(December 23, 2013), 78 FR 79542 (December 30, 2013) (Order Granting
Approval of Proposed Rule Change; File No. SR-FINRA-2013-025)
(``Supervisory Rules Filing''); see also Regulatory Notice 14-10
(March 2014) (Consolidated Supervision Rules). Paragraph (d)(1) of
the rule requires that a member's supervisory procedures must
include a process for the review of securities transactions that is
reasonably designed to identify trades that may violate the
provisions of the Act, its regulations, or FINRA rules prohibiting
insider trading and manipulative and deceptive devices that are
effected for the accounts specified under paragraphs (d)(1)(A)
through (d)(1)(D) of the rule.
\6\ See Regulatory Notice 09-22 (April 2009) (Personal
Securities Transactions).
\7\ Comments are discussed in Item II.C of this filing. As
discussed further in Item II.C, commenters expressed concern that
Rule 3210, as proposed in the Notice, would be burdensome or
difficult to implement and that the rule should, informed by the
approach of current NASD Rule 3050, be revised to permit firms
flexibility to craft appropriate supervisory policies and procedures
taking into account their business models and the risk profiles of
their activities.
---------------------------------------------------------------------------
(A) Background: NASD Rule 3050 and NYSE Rules 407 and 407A
NASD Rule 3050 and NYSE Rules 407 and 407A are longstanding rules
that address specified accounts opened or established by associated
persons of members at firms other than the firm with which they are
associated.
NASD Rule 3050 (designated in its original form as Section 28 of
the Rules of Fair Practice) was adopted to address this issue by
providing a means by which members would be informed of the extent and
nature of transactions effected by their employees or other associated
persons,\8\ so that members, in their own interest and in the interest
of their customers, might weigh the effect, if any, of such
transactions handled outside their firms.\9\ The rule imposes specified
obligations on member firms and associated persons.\10\ In short:
---------------------------------------------------------------------------
\8\ The terms ``person associated with a member'' and
``associated person of a member'' include, among others, registered
representatives. See paragraph (rr) of Article I of the FINRA By-
Laws.
\9\ See Securities Exchange Act Release No. 4924 (August 21,
1953).
\10\ FINRA historically has noted that the purpose of the rule
(originally designated Article III, Section 28 of the Rules of Fair
Practice) is to ``help member firms discharge their supervisory
responsibility over the securities activities conducted in their
associated persons' personal securities accounts.'' Securities
Exchange Act Release No. 23754 (October 28, 1986), 51 FR 40546
(November 7, 1986) (Proposed Rule Change; File No. SR-NASD-86-29).
---------------------------------------------------------------------------
Obligations of Member Firms: NASD Rule 3050(a) requires
that a member (called an ``executing member'') who knowingly executes a
transaction for the purchase or sale of a security for the account of a
person associated with another member (called an ``employer member''),
or for any account over which the associated person has discretionary
authority, must use reasonable diligence to determine that the
execution of the transaction will not adversely affect the interests of
the employer member. NASD Rule 3050(b) requires that, where an
executing member knows that a person associated with an employer member
has or will have a financial interest in, or discretionary authority
over, any existing or proposed account carried by the executing member,
the executing member must:
(1) Notify the employer member in writing, prior to the execution
of a transaction for the account, of the executing member's intention
to open or maintain that account;
(2) Upon written request by the employer member, transmit duplicate
copies of confirmations, statements, or other information with respect
to the account; and
(3) Notify the person associated with the employer member of the
executing member's intention to provide the notice and information
required by (1) and (2).
Obligations of Associated Persons: NASD Rules 3050(c) and
Rule 3050(d), in combination, address associated persons, whether they
open securities accounts or place securities orders through a member
firm other than their employer or whether they do so through other
types of financial services firms that are not FINRA members.\11\
Specifically:
---------------------------------------------------------------------------
\11\ NASD Rule 3050(e) provides that Rules 3050(c) and (d) apply
only to accounts or orders in which an associated person has a
financial interest or with respect to which the associated person
has discretionary authority.
---------------------------------------------------------------------------
(1) NASD Rule 3050(c) requires that a person associated with a
member, prior to opening an account or placing an initial order for the
purchase or sale of securities with another member, must notify both
the employer member and the executing member, in writing, of his or her
association with the other member. The rule provides that if the
account was established prior to the person's association with the
employer member, the person must notify both members in writing
promptly after becoming associated;
(2) NASD Rule 3050(d) provides that if the associated person opens
a securities account or places an order for the purchase or sale of
securities with a broker-dealer that is registered pursuant to SEA
Section 15(b)(11) (a notice-registered broker-dealer), a domestic or
foreign investment adviser, bank, or other financial institution (that
is, firms that are not FINRA members), then he or she must: (i) Notify
his or her employer member in writing, prior to the execution of any
initial transactions, of the intention to open the account or place the
order; and (ii) upon written request by the employer member, request in
writing and assure that the notice-registered broker-dealer, investment
adviser, bank, or other financial institution provides the
[[Page 48943]]
employer member with duplicate copies of confirmations, statements, or
other information concerning the account or order. NASD Rule 3050(d)
provides that if an account subject to Rule 3050(d) was established
prior to the person's association with the member, the person must
comply with the rule promptly after becoming associated;
(3) NASD Rule 3050(f) provides that the requirements of Rule 3050
do not apply to transactions in unit investment trusts and variable
contracts or redeemable securities of companies registered under the
Investment Company Act of 1940, or to accounts which are limited to
transactions in such securities.
NYSE Rule 407, similar in purpose to FINRA Rule 3050, addresses
transactions by and for employees of member firms \12\ as follows:
---------------------------------------------------------------------------
\12\ See note 10 supra. The NYSE noted that Rule 407 imposes
obligations as to specified personal accounts of employees and
associated persons and that one of the rule's purposes, among other
things, is to help deter and detect violations of applicable federal
securities laws and regulations. See NYSE Information Memo 09-50
(October 30, 2009) (Supervision of Trading in Proprietary, Employee
and Employee-Related Securities and Commodities Accounts).
---------------------------------------------------------------------------
NYSE Rule 407(a) is similar to NASD Rule 3050(b), except
that Rule 407(a) imposes a requirement to obtain the prior written
consent of the employer member.\13\ Specifically, the rule requires
that no member or member organization may, without the prior written
consent of the employer, open a securities or commodities account or
execute any transaction in which a member or employee associated with
another member or member organization is directly or indirectly
interested. The rule requires that duplicate confirmations and account
statements be sent promptly to the employer.
---------------------------------------------------------------------------
\13\ The term ``employer member'' is defined within the context
of the NASD rule, not the NYSE rule. For purposes of discussing NYSE
Rule 407, in this filing the term ``employer member'' is used
interchangeably with ``employer'' for convenience.
---------------------------------------------------------------------------
NYSE Rule 407(b) is similar to NASD Rules 3050(c) and (d),
except that, like NYSE Rule 407(a), it also sets forth a prior written
consent requirement. The rule requires that no member associated with a
member or member organization may establish or maintain any securities
or commodities account \14\ or enter into any securities transaction
with respect to which such person has any financial interest or the
power, directly or indirectly, to make investment decisions, at another
member or member organization, or a domestic or foreign non-member
broker-dealer, investment adviser, bank, other financial
institution,\15\ or otherwise without the prior written consent of
another person designated by the member or member organization to sign
such consents and review such accounts. The rule requires that persons
having accounts or effecting transactions as covered by the rule must
arrange for duplicate confirmations and statements (or their
equivalents) to be sent to a person designated by the member or member
organization to review such accounts and transactions. The rule further
requires that all such accounts and transactions must periodically be
reviewed by the member or member organization employer.\16\
---------------------------------------------------------------------------
\14\ NYSE Rule 407.11 states that the term ``securities or
commodities accounts'' as used in Rule 407(b) includes, but is not
limited to, limited or general partnership interests in investment
partnerships.
\15\ NYSE Rule 407.13 states that, for purposes of the rule, the
term ``other financial institution'' includes, but is not limited
to, insurance companies, trust companies, credit unions and
investment companies.
\16\ NYSE Rule 407.11 requires that members and member
organizations must develop and maintain written procedures for
reviewing such accounts and transactions and must assure that their
associated persons are not improperly recommending or marketing such
securities or products to others through members or member
organizations.
---------------------------------------------------------------------------
NYSE Rule 407.12 provides that the rule's requirement to
send duplicate confirmations and statements does not apply to
transactions in unit investment trusts and variable contracts or
redeemable securities of companies registered under the Investment
Company Act of 1940, or to accounts which are limited to transactions
in such securities, or to Monthly Investment Plan type accounts, unless
the employer member requests receipt of duplicate confirmations and
statements of such accounts. As such, the provision is similar to the
corresponding provisions under NASD Rule 3050(f), except that Rule
3050(f) wholly excepts the specified transactions and accounts from the
scope of Rule 3050.
In addition, NYSE Rule 407A (Disclosure of All Member Accounts)
requires members (i.e., natural persons approved by the New York Stock
Exchange (the ``Exchange'') and designated by a member organization to
effect transactions on the floor of the Exchange or any facility
thereof) to promptly report to the Exchange any securities account,
including an error account, in which the member has, directly or
indirectly, any financial interest or the power to make investment
decisions. Such accounts include any account at a member or non-member
broker-dealer, investment adviser, bank or other financial institution.
NYSE Rule 407A also requires a member having such an account to notify
the financial institution that carries or services the account that it
is a NYSE member. In addition, the rule requires that members report to
the Exchange when any such securities account is closed.
NYSE Rule 407A was adopted in 2001 as part of a series of
initiatives designed to strengthen the regulation of activities of NYSE
floor brokers.\17\ This rule expands the obligations placed upon
members under Rule 407 by requiring disclosure to the Exchange. These
reporting requirements were designed to provide the NYSE with current
information about where floor members carry securities accounts and to
enhance its ability to investigate quickly the trading of securities by
such members.
---------------------------------------------------------------------------
\17\ The Commission noted that these initiatives would aid the
NYSE in fulfilling some of the undertakings included in the NYSE's
1999 settlement with the SEC regarding failure to enforce compliance
with SEA Section 11(a) and SEA Rule 11a-1 and NYSE Rules 90, 95 and
111 with respect to activity of floor brokers. As noted by the
Commission, broadly, those provisions were aimed at preventing NYSE
floor broker members from exploiting their advantageous position on
the NYSE floor for personal gain to the detriment of the investing
public. See In the Matter of New York Stock Exchange, Inc.,
Securities Exchange Act Release No. 41574 (June 29, 1999),
Administrative Proceeding File No. 3-9925; Securities Exchange Act
Release No. 42381 (February 3, 2000), 65 FR 6673 (February 10, 2000)
(Notice of Filing of Proposed Rule Change; File No. SR-NYSE-99-25);
Securities Exchange Act Release No. 44769 (September 6, 2001), 66 FR
47710 (September 13, 2001) (Order Granting Approval to Proposed Rule
Change; File No. SR-NYSE-99-25).
---------------------------------------------------------------------------
NYSE Rule Interpretation 407/01 addresses the process for
determining whether the account of a spouse of an associated person
should be subject to NYSE Rule 407.
NYSE Rule Interpretation 407/02 provides that NYSE Rule 407(b)
applies when an associated person is also a majority stockholder of a
non-public corporation that wishes to open a discretionary margin
account at another member.
(B) Proposed FINRA Rule 3210
Proposed FINRA Rule 3210, consistent with the longstanding purposes
of NASD Rule 3050 and NYSE Rule 407,\18\ is designed to enable members
to monitor the personal accounts of their associated persons opened or
established outside of the member firm. The new rule, in combination
with new FINRA Rule 3110, takes the approach that a member is
responsible for supervising its associated persons' trading
activities.\19\
[[Page 48944]]
The rule begins by setting forth a requirement that an associated
person must obtain the prior written consent of his or her employer
when opening a specified account at another member or other financial
institution. Specifically, proposed FINRA Rule 3210(a) provides that no
person associated with a member (``employer member'') shall, without
the prior written consent of the member, open or otherwise establish at
a member other than the employer member (``executing member''), or at
any other financial institution,\20\ any account in which securities
transactions can be effected \21\ and in which the associated person
has a beneficial interest.\22\ Proposed FINRA Rule 3210.02 provides
that, for purposes of the rule, the associated person shall be deemed
to have a beneficial interest in any account that is held by: (a) The
spouse of the associated person; (b) a child of the associated person
or of the associated person's spouse, provided that the child resides
in the same household as or is financially dependent upon the
associated person; (c) any other related individual over whose account
the associated person has control; or (d) any other individual over
whose account the associated person has control and to whose financial
support the associated person materially contributes.\23\ The types of
accounts specified pursuant to proposed FINRA Rule 3210.02 are designed
to align with ``covered accounts'' as defined pursuant to new FINRA
Rule 3110(d)(4)(A) for purposes of the transaction review and
investigation provisions pursuant to Rule 3110(d)(1).\24\ Further,
FINRA believes the proposed language is consistent with the broad
approach of NASD Rule 3050 and NYSE Rule 407 as historically understood
to facilitate the monitoring of associated persons' personal and
related accounts.\25\ FINRA notes that the proposed new language
eliminates the language in the current rules that references accounts
or transactions where the associated person has ``the power, directly
or indirectly, to make investment decisions,'' as set forth in NYSE
Rule 407(b), and accounts where the associated person has
``discretionary authority,'' as set forth in NASD Rule 3050(b).\26\
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\18\ See note 10 and note 12 supra.
\19\ See Supervisory Rules Filing and note 5 supra. In this
connection, as discussed further in Item II.A.1(C) below, FINRA is
deleting the provision under NASD Rule 3050(a) as to the obligation
of the executing member to use reasonable diligence with respect to
the specified transactions.
\20\ Based on NYSE Rule 407.13 and NASD Rule 3050(d), proposed
FINRA Rule 3210.05 provides that, for the purposes of the rule, the
terms ``other financial institution'' and ``financial institution
other than a member'' include, but are not limited to, any broker-
dealer that is registered pursuant to SEA Section 15(b)(11),
domestic or foreign non-member broker-dealer, investment adviser,
bank, insurance company, trust company, credit union and investment
company.
\21\ In the interest of helping facilitate supervision of
securities transactions under new FINRA Rule 3110(d)(1), FINRA is
specifying ``any account in which securities transactions can be
effected'' so as to be clear that the proposed rule's scope includes
any account, regardless of type, where securities transactions can
take place as specified under the rule.
\22\ As proposed in the Notice, the rule would have specified
accounts in which the associated person has a ``personal financial
interest.'' Commenters suggested that this language was unclear. See
Item II.C.2 of this filing. FINRA is proposing the term ``beneficial
interest'' because that term is an established and well-understood
standard. See, e.g., FINRA Rule 5130(i)(1), which defines
``beneficial interest'' to mean, in part, any economic interest,
such as the right to share in gains or losses. FINRA believes that
the proposed term is consistent with the purpose of NYSE Rule 407,
which in part addresses transactions in which the associated person
is ``directly or indirectly interested'' (NYSE Rule 407(a)) or with
respect to which the associated person ``has any financial
interest'' (NYSE Rule 407(b)) and with NASD Rules 3050(b) through
(d), which in part address accounts or transactions in which the
associated person has a ``financial interest.'' Further, the
proposed term would align the rule with ``beneficial interest'' as
specified under new FINRA Rule 3110(d)(1)(B), which, for purposes of
the transaction review and investigation provisions set forth under
new FINRA Rule 3110(d)(1), specifies in part accounts ``in which a
person associated with the member has a beneficial interest.'' See
note 5 supra.
\23\ Some commenters expressed concerns as to addressing spouse
accounts in the proposed rule. FINRA notes that spouse accounts have
long been addressed under NYSE Rule Interpretation 407/01. See Item
II.C.2 of this filing.
\24\ See note 5 supra.
\25\ For example, with respect to the approach of the current
rules, as noted earlier, NYSE Rule Interpretation 407/01 addresses
spouse accounts. In the context of amendments to NASD Rule 3050
(then designated Article III, Section 28 of the Rules of Fair
Practice) adopted in 1983 that extended the rule to include accounts
over which the associated person exercises discretion, FINRA noted
its intent to enable the rule's scope to reach accounts of relatives
of associated persons where the associated person places the orders.
See Securities Exchange Act Release No. 19347 (December 16, 1982),
47 FR 58416 (December 30, 1982) (Proposed Rule Change; File No. SR-
NASD-82-25); Securities Exchange Act Release No. 19550 (February 28,
1983), 48 FR 9413 (March 4, 1983) (Order Approving Proposed Rule
Change; File No. SR-NASD-82-25). FINRA believes that because the
proposed rule specifies, in language that aligns with new FINRA Rule
3110(d)(4)(A), the types of personal relationships that would be
within the scope of ``beneficial interest,'' the rule's precise
parameters should be more clear.
\26\ FINRA believes that this will serve to more clearly
demarcate the respective scope of the new rule vis-[agrave]-vis
current NASD Rule 3040, which addresses the obligations of
associated persons and members in connection with private securities
transactions. NASD Rule 3040(e)(1) defines private securities
transactions to include, in part, ``any securities transaction
outside the regular course or scope of an associated person's
employment with a member'' and excludes from the rule's specified
notification requirements, among other things, transactions subject
to the notification requirements of NASD Rule 3050. FINRA believes
that, to the extent associated persons make investment decisions or
have discretionary authority in contexts that involve private
securities transactions within the scope of NASD Rule 3040, as
opposed to accounts in which they have a beneficial interest as
specified by the new rule, such transactions are properly addressed
by the requirements set forth in Rule 3040 and other FINRA rules as
applicable. FINRA believes that this approach is consistent, as
noted earlier, with the historical approach of NASD Rule 3050 and
NYSE Rule 407 that is intended to facilitate monitoring of
associated persons' personal and related accounts.
---------------------------------------------------------------------------
Similar to the current rules, the new rule places notification
obligations on associated persons with respect to the executing member
or other financial institution. Specifically, proposed FINRA Rule
3210(b) is based in large part on NASD Rules 3050(c) and 3050(d) and
provides that any associated person, prior to opening or otherwise
establishing an account subject to the rule, must notify in writing the
executing member, or other financial institution, of his or her
association with the employer member.
Also similar to the current rules, the new rule specifies
obligations for executing members. Specifically, proposed FINRA Rule
3210(c) is based in large part on NASD Rule 3050(b)(2) and provides
that an executing member must, upon written request by the employer
member, transmit duplicate copies of confirmations and statements, or
the transactional data contained therein, with respect to an account
subject to the rule.\27\
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\27\ As published in the Notice, the proposed rule would have
required the employer member to instruct the associated person to
have the executing member provide the specified duplicate account
statements and confirmations to the employer member. As discussed
further in Item II.C.1 of this filing, commenters expressed concern
that the rule as proposed in the Notice would burden members with
collecting the specified information without regard to whether such
collection is warranted by the member's business model and risk
profile. In response to commenter suggestion, FINRA has revised the
proposed rule so that the specified information is provided upon
written request by the employer member, which is consistent with the
approach of current NASD Rule 3050 and which FINRA believes permits
members flexibility to craft appropriate supervisory policies and
procedures according to their business model and the risk profile of
their activities.
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Similar to current provisions in NASD Rules 3050(c) and 3050(d),
the proposed rule makes allowance for accounts opened by an associated
person prior to his or her association with the employer member.
Specifically, proposed FINRA Rule 3210.01 provides that, if the account
was opened or otherwise established prior to the person's association
with the employer member, the associated person, within 30 calendar
days of becoming so associated, must obtain the written consent of the
employer member to maintain the account and must notify in writing the
executing member or other financial institution of his or her
[[Page 48945]]
association with the employer member.\28\
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\28\ As published in the Notice, the proposed rule would have
specified 15 business days. In response to comment, the proposed
rule as revised specifies 30 calendar days so as to reduce burdens
on member firms and their associated persons. See Item II.C.3 of
this filing.
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Similar to the current rules, the new rule makes allowance for
specified information that executing members need not transmit to
employer members. Specifically, proposed FINRA Rule 3210.03 is based in
large part on NYSE Rule 407.12 and NASD Rule 3050(f) and provides that
the requirement (pursuant to paragraph (c) of Rule 3210) that the
executing member provide the employer member, upon the employer
member's written request, with duplicate account confirmations and
statements, or the transactional data contained therein, shall not be
applicable to transactions in unit investment trusts, municipal fund
securities as defined under MSRB Rule D-12,\29\ qualified tuition
programs pursuant to Section 529 of the Internal Revenue Code and
variable contracts or redeemable securities of companies registered
under the Investment Company Act, as amended, or to accounts that are
limited to transactions in such securities, or to Monthly Investment
Plan type accounts.\30\
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\29\ MSRB Rule D-12 defines municipal fund security to mean ``a
municipal security issued by an issuer that, but for the application
of Section 2(b) of the Investment Company Act of 1940, would
constitute an investment company within the meaning of Section 3 of
the Investment Company Act of 1940.''
\30\ The approach to the referenced types of transactions
reflects a longstanding intention under the NASD and NYSE rule that
members not be burdened with information collection for transactions
that pose limited risk from the standpoint of the rule's supervisory
purposes. See, e.g., Securities Exchange Act Release No. 19347
(December 16, 1982), 47 FR 58416 (December 30, 1982) (Proposed Rule
Change; File No. SR-NASD-82-25). As discussed further in Item II.C.5
of this filing, the proposed requirement is largely as published in
the Notice. In response to commenter suggestion, FINRA has added
municipal fund securities as defined under MSRB Rule D-12 and
Section 529 plans to the transactions set forth under the rule.
FINRA is adding these transactions because FINRA believes these
types of products are reasonably classed with the types of
transactions specified under the current rule in posing limited risk
from the standpoint of the rule's supervisory purposes.
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Proposed FINRA Rule 3210.04 is new and provides that, with respect
to an account subject to the rule at a financial institution other than
a member, the employer member must consider the extent to which it will
be able to obtain, upon written request, duplicate copies of
confirmations and statements, or the transactional data contained
therein, directly from the non-member financial institution in
determining whether to provide its written consent to an associated
person to open or maintain such account.\31\ FINRA believes that the
proposed requirement serves a valid regulatory purpose in view of the
employer member's responsibility for supervising its associated
persons' trading activities.
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\31\ As published in the Notice, the proposed rule would have
required the associated person to provide an instruction to the non-
member financial institution to provide the specified information to
the employer member. As discussed further in Item II.C.1 of this
filing, FINRA believes that the requirement as revised permits
members flexibility to craft appropriate supervisory policies and
procedures in determining whether to provide written consent as to
the specified accounts at non-member financial institutions.
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(C) Deleted Requirements
Proposed FINRA Rule 3210 deletes a number of requirements in NASD
Rule 3050 and NYSE Rule 407 that are rendered outdated by the new rule
or are otherwise addressed elsewhere by FINRA rules.
The proposed rule eliminates NASD Rule 3050(a)'s
requirement that the executing member use reasonable diligence to
determine that the execution of the transaction will not ``adversely
affect the interests of the employer member.'' FINRA proposes to delete
this requirement because FINRA believes that it is appropriate for the
new rule, in combination with new FINRA Rule 3110,\32\ to take the
approach that the employer member is responsible for supervising its
associated persons' trading activities.\33\
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\32\ See Supervisory Rules Filing.
\33\ FINRA notes that, notwithstanding this approach, the rule
retains the longstanding duty of the executing member to assist the
employer member by providing the specified information upon request.
---------------------------------------------------------------------------
FINRA proposes to delete the account review requirements
set forth in NYSE Rule 407(b) and the requirements for written
procedures set forth in NYSE Rule 407.11 because these issues are
addressed by the proposed rule in combination with FINRA's new
supervisory rules, in particular new FINRA Rule 3110(d), which sets
forth the new supervisory framework for securities transactions review
and investigation.\34\
---------------------------------------------------------------------------
\34\ See note 5 supra and Supervisory Rules Filing.
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As noted earlier, NYSE Rule 407A was intended to address
activities of NYSE floor brokers. FINRA proposes to delete NYSE Rule
407A in its entirety from the Transitional Rulebook because proposed
FINRA Rule 3210 requires disclosure at the member firm level of the
same types of information that Rule 407A requires with respect to the
NYSE as to floor brokers. FINRA believes it is more appropriate to
require member firms to obtain the required information and to
supervise the accounts of their associated persons for improper
trading, rather than requiring that such information be sent directly
to FINRA. Moreover, as noted above, these reporting requirements were
designed to provide the NYSE with current information about where floor
members carry securities accounts and to enhance its ability to
investigate quickly the trading of securities by such members.
FINRA proposes to delete NYSE Rule Interpretation 407/01
because it would be superseded by proposed FINRA Rule 3210.02, which as
noted earlier expressly provides, among other things, that an
associated person is deemed to have a beneficial interest in any
account that is held by the spouse of the associated person.
FINRA proposes to delete NYSE Rule Interpretation 407/02
because it is rendered redundant by new FINRA Rule 3210(a), the scope
of which by its terms reaches accounts as specified by the rule in
which the associated person has a beneficial interest.
FINRA proposes to delete language referring to accounts or
transactions where the associated person has ``the power, directly or
indirectly, to make investment decisions,'' as set forth in NYSE Rule
407(b), and accounts where the associated person has ``discretionary
authority,'' as set forth in NASD Rule 3050(b). As discussed above,
FINRA believes that, to the extent associated persons make investment
decisions or have discretionary authority in contexts that involve
private securities transactions within the scope of NASD Rule 3040, as
opposed to accounts in which they have a beneficial interest, such
transactions are properly addressed by the requirements set forth in
Rule 3040 and other FINRA rules as applicable.\35\
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\35\ See note 26 supra.
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If the Commission approves the proposed rule change, 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 365
days following Commission approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\36\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and
[[Page 48946]]
equitable principles of trade, and, in general, to protect investors
and the public interest. FINRA believes that the proposed rule change
will further the purposes of the Act because, as part of the FINRA
rulebook consolidation process, the proposed rule change will help to
protect investors and the public interest by streamlining and
reorganizing existing rules that promote effective oversight of
accounts opened or established by associated persons of members at
firms other than the firm with which they are associated. By setting
forth the requirements pursuant to which associated persons will seek
the prior written consent of the employer member to open or otherwise
establish accounts as specified under the rule, and pursuant to which
the specified information will be transmitted to the employer member
upon the employer member's request, the proposed rule will facilitate
the supervision of the trading activities of associated persons within
the framework of FINRA's new supervisory rules as approved by the
Commission. The proposed rule will also help members ensure that such
activities, engaged in at executing members or other financial
institutions, do not violate provisions of the Act, its regulations, or
FINRA rules, thereby helping to ensure orderly markets.
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\36\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
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. Commenters expressed concern
that the proposed rule change, as originally published in Regulatory
Notice 09-22, would have been burdensome to implement and would have
resulted in employer members being required to request information from
executing members and non-member financial institutions bearing little
or no relationship to the scope and nature of the employer member's
activities. In response to commenter suggestion, FINRA revised the
proposed rule so as to permit members discretion, consistent with their
supervisory obligations under new FINRA Rule 3110(d), to request the
specified information of executing members and non-member financial
institutions, thereby permitting members reasonable flexibility to
craft appropriate supervisory policies and procedures according to
their business model and the risk profile of their activities. The
proposed rule change as revised is thereby consistent with the approach
of current NASD Rule 3050, which commenter suggestion supported. FINRA
believes that because the proposed rule change, as revised, is
consistent with current requirements and longstanding practice, it will
not impose additional burdens on members.
The proposed rule change permits members to implement supervisory
procedures that align with their business models, without diminishing
members' supervisory obligations with respect to the activities of
their associated persons. FINRA believes that this proposed approach
imposes less cost on members without reducing investor protections. In
addition, the proposed rule change deletes a number of requirements in
NASD Rule 3050 and NYSE Rule 407 that are rendered outdated by the
proposed new rule or are otherwise addressed elsewhere by other FINRA
rules, which further minimizes the potential compliance burden on
members in light of the objectives of the proposed rule change. FINRA
recognizes that providing such flexibility to members may require
increased monitoring of members' compliance with this rule as part of
FINRA's examination program.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The proposed rule change was published for comment in Regulatory
Notice 09-22 (April 2009). A copy of the Notice is attached as Exhibit
2a. Thirty-three commenters responded to the Notice, and a list of the
commenters is attached as Exhibit 2b.\37\ Copies of the comment letters
received in response to the Notice are attached as Exhibit 2c.
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\37\ All references to commenters under this Item are to the
commenters as listed in Exhibit 2b.
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1. Core Proposed Rule Requirements: Obligation To Provide Duplicate
Account Statements and Confirmations
As published in the Notice, proposed FINRA Rule 3210(a) in part
would have required an employer member, as a condition to giving prior
written consent for opening or establishing an account pursuant to the
rule, to instruct the associated person to have the executing member
provide duplicate account statements and confirmations to the employer
member. Paragraph (b) set forth requirements pertaining to the
associated person's obligation to notify the executing member or other
financial institution in writing of his or her association with the
employer member. Paragraph (c) of the rule would have provided in part
that the executing member must promptly obtain and implement an
instruction from the associated person directing that duplicate account
statements and confirmations be provided to the employer member. (With
respect to accounts opened at a financial institution other than a
member, proposed FINRA Rule 3210.02 as published in the Notice would
have required the associated person to provide the instruction to the
financial institution.)
Commenters generally expressed concern that, as published in the
Notice, the requirements of proposed Rules 3210(a), (b) and (c) and
3210.02, singly or in combination, are unnecessary for regulatory
purposes, are burdensome or difficult for firms to implement, or the
rule should be designed to permit members the discretion to determine
whether, based on their business model and the risk profile of their
activities, they need to require duplicate account statements and
confirmations to carry out their supervisory responsibilities.\38\ Some
of these commenters suggested that involving the associated person in
the process of requesting the required data vis-[agrave]-vis the
executing member creates supervisory risks.\39\ A number suggested that
it is better practice and more efficient to have the employer member
obtain the required data directly from the executing member or non-
member institution.\40\ A few of the commenters raised concerns about
potential difficulties in obtaining the required information from non-
members (including foreign non-members).\41\ Many questioned the
supervisory and regulatory value of requiring firms to collect data
pertaining to associated person accounts and transactions bearing
little or no relationship to the scope and nature of their firms'
activities.\42\ Some suggested that current NASD Rule 3050 generally
permits members to exercise such discretion and that retaining the
approach of the NASD rule would be conducive to more efficient use of
regulatory or supervisory resources.\43\
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\38\ ACLI, CAI, Channel Capital, Charles Schwab, Farmers
Financial, FSI, GWFS, Hillard, IBSI, ICI, MWA, NAIBD, National
Planning, NMIS, NSCP, PFSI, PSI, Quasar, SIFMA, State Farm,
SunTrust, Sykes, UBS, WFA and Witthaut.
\39\ National Planning, PSI, SIFMA and UBS.
\40\ Charles Schwab, FSI, NMIS, SIFMA and UBS.
\41\ Charles Schwab, SIFMA and UBS.
\42\ ACLI, CAI, Farmers Financial, GWFS, Hillard, ICI, MWA,
National Planning, Quasar, State Farm, SunTrust, Sykes and Witthaut.
\43\ CAI, Charles Schwab, Farmers Financial, FSI, National
Planning, PFSI and SunTrust.
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In response, FINRA agrees that the proposal as published in the
Notice raises issues with respect to the efficient use and conservation
of regulatory and
[[Page 48947]]
supervisory resources, as well as to implementation. FINRA has revised
proposed FINRA Rule 3210, consistent with NASD Rule 3050, to provide
that an executing member must, upon written request by an employer
member, transmit the duplicate copies of confirmations and statements,
or the transactional data contained therein.\44\ With respect to
accounts at a financial institution other than a member, FINRA has
revised the rule to provide that the employer member must consider the
extent to which it will be able to obtain, upon written request,
duplicate copies of confirmations and statements, or the transactional
data contained therein, directly from the institution in determining
whether to provide its written consent to an associated person to open
or maintain an account subject to the rule.\45\ FINRA believes that
this approach, based in large part on the longstanding approach of NASD
Rule 3050, should provide members reasonable flexibility to craft
appropriate supervisory policies and procedures according to their
business model and the risk profile of their activities. FINRA reminds
members that, in permitting such flexibility, the rule in no way
lessens members' supervisory obligations under FINRA rules with respect
to the activities of their associated persons.\46\
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\44\ See proposed FINRA Rule 3210(c).
\45\ See proposed FINRA Rule 3210.04.
\46\ See note 5 supra and Supervisory Rules Filing.
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2. Personal Financial Interest of the Associated Person
As published in the Notice, the accounts covered by proposed FINRA
Rule 3210 would have reached in part those in which the associated
person has a ``personal financial interest.'' The Notice stated that
``personal financial interest'' would as a general matter extend to a
spouse's account. Commenters expressed concern as to the scope and
meaning of the term ``personal financial interest'' and requested that
FINRA further define the term, limit its scope, or otherwise provide
more specific guidance.\47\ Several commenters suggested generally that
it would be more effective for the rule to speak to accounts with
respect to which the associated person exercises control or authority,
rather than having a ``personal financial interest.'' \48\
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\47\ CAI, Charles Schwab, Farmers Financial, IBSI, ICI, NAIBD,
NMIS, NPB, NSCP and SIFMA.
\48\ Charles Schwab, Farmers Financial, FSI, NMIS and SIFMA.
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In response, FINRA is proposing a standard that is consistent with
the purpose of NASD Rule 3050 and NYSE Rule 407 \49\ while also
aligning more clearly with new FINRA Rule 3110(d). Specifically, FINRA
has revised the proposed rule to extend to specified accounts in which
the associated person has a beneficial interest. As discussed earlier,
FINRA believes the term ``beneficial interest'' is appropriate because
that term is an established and well-understood standard \50\ and is
consistent with the terms ``directly or indirectly interested,'' as
used in NYSE Rule 407(a), ``has any financial interest,'' as used in
NYSE Rule 407(b), and accounts or transactions in which the associated
person has a ``financial interest,'' as applicable under NASD Rules
3050(b) through (d). Further, the proposed term would align the rule
with ``beneficial interest'' as specified under new FINRA Rule
3110(d)(1)(B), which, for purposes of the transaction review and
investigation provisions set forth under new FINRA Rule 3110(d)(1),
specifies in part accounts ``in which a person associated with the
member has a beneficial interest.'' \51\ In addition, FINRA is
proposing, as Supplementary Material .02 to the rule, to provide that
the associated person shall be deemed to have a beneficial interest in
any account that is held by: (a) The spouse of the associated person;
(b) a child of the associated person or of the associated person's
spouse, provided that the child resides in the same household as or is
financially dependent upon the associated person; (c) any other related
individual over whose account the associated person has control; or (d)
any other individual over whose account the associated person has
control and to whose financial support the associated person materially
contributes. As noted earlier, this proposed language is designed to
align with ``covered accounts'' as defined pursuant to new FINRA Rule
3110(d)(4)(A) for purposes of the transaction review and investigation
provisions pursuant to Rule 3110(d)(1).\52\
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\49\ See note 10 and note 12 supra.
\50\ FINRA Rule 5130(i)(1) defines ``beneficial interest'' to
mean, in part, any economic interest, such as the right to share in
gains or losses. See note 22 supra.
\51\ See note 5 supra.
\52\ See proposed FINRA Rule 3210.02. Some commenters questioned
whether it is legally viable for the proposed rule to reach spouse
accounts. See Charles Schwab and NPB. In response, FINRA notes that
spouse accounts have long been addressed under NYSE Rule
Interpretation 407/01. Further, FINRA notes that the rule addresses
such accounts as a supervisory matter under FINRA rules for purposes
of investor protection and market integrity. See also note 5 supra
and new FINRA Rule 3110(d).
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3. Accounts Opened Prior to Association With the Employer Member
As published in the Notice, proposed FINRA Rule 3210.01 would have
required that if the associated person's account was opened or
otherwise established prior to his or her association with the employer
member, the associated person would be required to obtain the employer
member's written consent to maintain the account within 15 business
days of becoming so associated. Commenters suggested that the 15-
business-day requirement is too short or restrictive and that the rule
should require ``prompt'' notification by the associated person, as
under current NASD Rule 3050, or permit a longer specified period.\53\
One commenter believed that the rule should not cover previously opened
accounts at all.\54\
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\53\ ACLI, CAI, Charles Schwab, FSI, National Planning, NMIS,
NSCP, SIFMA and WFA.
\54\ Fischer.
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In response, FINRA notes that it serves a valid regulatory purpose
that the proposed rule should extend to accounts opened prior to the
associated person's association with the employer member, given that
the associated person would have the ability to effect transactions in
such accounts. FINRA believes that it is reasonable, from the
standpoint of reducing burdens on member firms and their associated
persons, to permit a longer amount of time for notification with
respect to already-opened accounts and has accordingly revised the rule
to permit 30 calendar days.\55\
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\55\ See proposed FINRA Rule 3210.01.
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4. Revocation of Consent To Maintain the Account
As published in the Notice, proposed FINRA Rule 3210.04 would have
created a new requirement providing that if the employer member does
not receive the associated person's duplicate statements and
confirmations in a timely manner, the employer member would be required
to revoke its consent to maintaining the account and would be required
to so notify the executing member or other financial institution in
writing. The rule would have required the employer member to promptly
obtain records from the executing member that the account was closed.
Commenters generally expressed concern that the proposed
requirement is burdensome, poses various difficulties as to
implementation, or that FINRA should provide guidance as to how
accounts should be closed
[[Page 48948]]
pursuant to the rule.\56\ In response, FINRA has reconsidered the
proposed requirement and agrees that it is not necessary, from the
standpoint of the rule's regulatory purpose, to prescribe how employer
members should respond to the delayed receipt, or non-receipt, of
duplicate copies of confirmations, statements or the transactional data
contained therein. First, FINRA believes that if an employer member
determines, pursuant to the rule, to request such information and does
not receive it in a timely fashion, then as a matter of sound
supervisory practice the employer member should have in place policies
and procedures to address the issue.\57\ Second, FINRA notes that the
proposed rule as revised requires executing members, upon written
request by an employer member, to transmit the duplicate copies of
confirmations and statements, or the transactional data contained
therein.\58\ Finally, FINRA takes note that many commenters requested
that FINRA Rule 3210 be designed to permit firms flexibility based upon
their business model and the risk profile of their activities.\59\ As
such, FINRA believes it is appropriate that employer members determine
for themselves what would constitute timely receipt of the information
required pursuant to the rule, provided such determination is
reasonable within the context of their overall supervisory obligations.
Accordingly, FINRA has deleted the requirement from the proposed rule
as revised.
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\56\ CAI, Charles Schwab, FSI, ICI, J.A. Glynn, National
Planning, NSCP, Pagemill, SIFMA, UBS and WFA.
\57\ FINRA notes that, with respect to accounts at non-member
financial institutions, the proposed rule as revised provides that
the employer must consider the extent to which it will be able to
obtain, upon written request, duplicate copies of confirmations and
statements, or the transactional data contained therein, directly
from the non-member financial institution in determining whether to
provide its written consent to an associated person to open or
maintain such an account.
\58\ See proposed FINRA Rule 3210(c).
\59\ See, e.g., Item II.C.1 of this filing.
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5. Transactions and Accounts Not Subject to Transmission Requirement
As published in the Notice, proposed FINRA Rule 3210.03 would have
provided that the requirement to provide to the employer member
duplicate account statements and confirmations is not applicable to
transactions in unit investment trusts and variable contracts or
redeemable securities of companies registered under the Investment
Company Act, as amended, or to accounts that are limited to
transactions in such securities, or to Monthly Investment Plan type
accounts, unless the employer member requests receipt of such duplicate
account statements and confirmations.
Commenters suggested that, because they believe the referenced
types of transactions and accounts pose little in the way of
supervisory risk, they should be exempted from the proposed rule's
requirements altogether, similar to the provisions under current NASD
Rule 3050(f), or that the proposed rule should expand and update types
of transactions and accounts that would be exempted from the rule.\60\
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\60\ ACLI, CAI, Charles Schwab, FSI, Hillard, National Planning,
NMIS, NPB, Pacific Select, SIFMA and UBS.
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FINRA appreciates members' concern that the new rule should adhere
closely to the current NASD requirement. However, FINRA believes that
the proposed approach, similar to that reflected in NYSE Rule 407.12,
serves a valid regulatory and supervisory purpose, specifically, that
the associated person must obtain the employer member's prior written
consent with respect to the referenced transactions and accounts, in
the manner and to the extent required by the proposed rule.
Accordingly, FINRA is proposing FINRA Rule 3210.03 largely as published
in the Notice. Some commenters made specific suggestions as to the
types of transactions and accounts that should be excluded from the
requirement that the executing member provide duplicate account
confirmations and statements to the employer member upon the employer
member's written request.\61\ In response, FINRA has added municipal
fund securities as defined under MSRB Rule D-12 and qualified Section
529 plans to the referenced types of transactions, as FINRA believes
that, of the suggestions proffered, these are similar to the types of
transactions specified under current NASD Rule 3050(f) and NYSE Rule
407.12 in posing limited risk from the standpoint of the rule's
supervisory purposes. Accordingly, proposed FINRA Rule 3210.03 as
revised provides that the requirement (pursuant to paragraph (c) of the
proposed rule) that the executing member provide the employer member,
upon the employer member's written request, with duplicate account
confirmations and statements, or the transactional data contained
therein, shall not be applicable to transactions in unit investment
trusts, municipal fund securities as defined under MSRB Rule D-12,
qualified tuition programs pursuant to Section 529 of the Internal
Revenue Code and variable contracts or redeemable securities of
companies registered under the Investment Company Act, as amended, or
to accounts that are limited to transactions in such securities, or to
Monthly Investment Plan type accounts.
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\61\ Four commenters specifically suggested qualified Section
529 plans under the Internal Revenue Code. See CAI, FSI, NMIS and
SIFMA. One suggested all municipal fund securities. See FSI. One
suggested in addition ETFs and registered insurance products. See
CAI.
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6. Information Gathering, Processes and Controls
The Notice requested comment on the methodologies that members
employ to obtain information pursuant to NASD Rule 3050 and NYSE Rule
407 and the processes and controls that members implement upon receipt
of the required information.
Commenters suggested the rule should not impose requirements as to
the methodologies that members must use (e.g., receiving the
information electronically versus in hard copy) or otherwise limit
flexibility as to receiving and handling the information.\62\ One
commenter suggested FINRA should encourage firms to use a consistent
electronic format in transmitting the information.\63\ One suggested
the proposed rule should state that the information can be received in
electronic format.\64\ One requested that FINRA specify in the rule a
retention period for information received pursuant to the rule.\65\
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\62\ FSI, H & L Equities, ICI, Investors Security, NAIBD, NPB,
NSCP, Pagemill, PSI and Taurus.
\63\ Pacific Select.
\64\ FSI.
\65\ H & L Equities.
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In response to comments, FINRA has determined not to specify in the
proposed rule any particular methodology. To this end, FINRA has
revised proposed FINRA Rule 3210(c) to provide for transmission of
``duplicate copies of confirmations and statements, or the
transactional data contained therein.'' FINRA does not propose to
specify in the rule a particular retention period because such concerns
are adequately addressed elsewhere under SEA Rule 17a-4 and FINRA Rule
4511 as appropriate.
7. Implementation Period
Several commenters suggested that FINRA should permit an extended
period for implementation of the proposed rule once approved.\66\ In
response, in establishing an implementation date, FINRA will take into
account that firms would need to modify their compliance systems to
reflect the new rule's requirements. As stated earlier in this filing,
FINRA will
[[Page 48949]]
announce such implementation date in a Regulatory Notice.
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\66\ ACLI, CAI, FSI and SIFMA.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. 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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-FINRA-2015-029 on the subject line.
Paper Comments
Send paper comments in triplicate to Robert W. Errett,
Deputy Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2015-029. This
file number should be included on the subject line if email 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 (https://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
10:00 a.m. and 3:00 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-2015-029 and should be
submitted on or before September 4, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\67\
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\67\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-20006 Filed 8-13-15; 8:45 am]
BILLING CODE 8011-01-P
