Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt FINRA Rules 5110 (Corporate Financing Rule), 5190 (Notification Requirements for Offering Participants) and 6470 (Withdrawal of Quotations in an OTC Equity Security in Compliance With SEC Regulation M) in the Consolidated FINRA Rulebook, 46657-46661 [E8-18371]

Download as PDF Federal Register / Vol. 73, No. 155 / Monday, August 11, 2008 / Notices of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. submitted on or before September 2, 2008. 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: BILLING CODE 8010–01–P rmajette on PRODPC74 with NOTICES Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–CBOE–2008–81 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington DC 20549–1090. All submissions should refer to File Number SR–CBOE–2008–81. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 am and 3 pm. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. 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 No. SR–CBOE–2008–81 and should be VerDate Aug<31>2005 15:22 Aug 08, 2008 Jkt 214001 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.16 Florence E. Harmon, Acting Secretary. [FR Doc. E8–18487 Filed 8–8–08; 8:45 am] SECURITIES AND EXCHANGE COMMISSION [Release No. 34–58302; File No. SR–FINRA– 2008–039] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt FINRA Rules 5110 (Corporate Financing Rule), 5190 (Notification Requirements for Offering Participants) and 6470 (Withdrawal of Quotations in an OTC Equity Security in Compliance With SEC Regulation M) in the Consolidated FINRA Rulebook August 4, 2008. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on July 16, 2008, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) (f/k/a National Association of Securities Dealers, Inc. (‘‘NASD’’)) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) 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 (1) adopt NASD Rule 2710, without material change except for paragraphs (b)(10) and (11), as a FINRA rule in the consolidated FINRA rulebook; and (2) clarify and streamline the notice and other requirements in FINRA rules relating to Regulation M under the Act (including paragraphs (b)(10) and (11) of NASD Rule 2710 and paragraph (a) of Incorporated NYSE Rule 392). The proposed rule change would renumber NASD Rule 2710 as FINRA Rule 5110 and adopt new FINRA Rules 5190 and 6470 in the consolidated FINRA rulebook. 16 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 46657 The text of the proposed rule change is available at FINRA, on FINRA’s Web site at http://www.finra.org, and in 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. 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 the new consolidated rulebook (‘‘Consolidated FINRA Rulebook’’),3 FINRA is proposing to (1) adopt NASD Rule 2710 as FINRA Rule 5110, with the exception of paragraphs (b)(10) and (11); (2) adopt new FINRA Rule 5190, which would house the Regulation M-related notice requirements applicable to members participating in securities offerings (including paragraphs (b)(10) and (11) of NASD Rule 2710 and paragraph (a) of Incorporated NYSE Rule 392); (3) adopt new FINRA Rule 6470, which would house certain Regulation M-related requirements that are currently in the OTC Bulletin Board (‘‘OTCBB’’) rules and would apply to all OTC Equity Securities;4 and (4) make conforming amendments to the Regulation M-related rules applicable to the Alternative Display Facility (‘‘ADF’’). Corporate Financing Rule NASD Rule 2710 (Corporate Financing Rule), except paragraphs (b)(10) and (11) (which are discussed below), regulates the underwriting terms 3 The current FINRA rulebook consists of two sets of rules: (1) NASD Rules and (2) rules incorporated from NYSE (‘‘Incorporated NYSE Rules’’) (together referred to as the ‘‘Transitional Rulebook’’). The Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (‘‘Dual Members’’). Dual Members also must comply with NASD Rules. For more information about the rulebook consolidation process, see FINRA Information Notice, March 12, 2008 (Rulebook Consolidation Process). 4 NASD Rule 6610(d) defines OTC Equity Security as ‘‘any non-exchange-listed security and certain exchange-listed securities that do not otherwise qualify for real-time trade reporting.’’ E:\FR\FM\11AUN1.SGM 11AUN1 46658 Federal Register / Vol. 73, No. 155 / Monday, August 11, 2008 / Notices and arrangements of most public offerings, including shelf offerings, of securities sold through FINRA members. The Rule requires members to file with FINRA’s Corporate Financing Department (the ‘‘Corporate Financing Department’’) information regarding initial public offerings and certain secondary offerings and to submit pertinent documentation, including registration statements. The Corporate Financing Department reviews this information prior to commencement of the offering to determine whether the underwriting compensation and other terms and arrangements meet the requirements of applicable FINRA rules. Members are required to receive the Corporate Financing Department’s opinion of no-objections to the offering terms prior to participating in the offering. FINRA is proposing to adopt NASD Rule 2710 as FINRA Rule 5110 in the Consolidated FINRA Rulebook. With the exception of the deletion of paragraphs (b)(10) and (11), as discussed below, FINRA is proposing to make only technical non-substantive changes to the Rule, such as replacing references to NASD or the Association with FINRA, and certain conforming changes to references in the Rule to, e.g., the Exchange Act, SEA Rules, the Securities Act and Securities Act Rules. Regulation M-Related Requirements rmajette on PRODPC74 with NOTICES Background and Discussion of Current FINRA Rules Regulation M is designed to prevent manipulation by persons with an interest in the outcome of an offering and generally prohibits activities and conduct that could artificially influence the market for an offered security.5 In this regard, Regulation M generally prohibits underwriters, broker-dealers, issuers and other persons participating in a distribution from directly or indirectly bidding for or purchasing the offered security (or inducing another person to do so) during the ‘‘restricted period,’’ which commences on the later of either one or five business days prior to the determination of the offering price or such time that a person becomes a distribution participant. For purposes of determining whether a one or five-day or no restricted period applies under Regulation M, the SEC has adopted a dual standard of worldwide average daily trading volume (‘‘ADTV’’) and public float value. Regulation M also governs certain market activities, usually undertaken by 5 See Exchange Act Release No. 38067 (December 20, 1996), 62 FR 520 (January 3, 1997). VerDate Aug<31>2005 15:22 Aug 08, 2008 Jkt 214001 the managing underwriter or underwriting group (i.e., stabilizing bids, syndicate covering transactions and penalty bids) 6 in connection with an offering and requires that notice of such activity be provided to the relevant self-regulatory organization or, in the case of stabilizing bids, the market where the stabilizing bid is to be posted. Finally, Regulation M generally prohibits any person from selling short a security that is the subject of a public offering and purchasing the security in the offering if such short sale was effected during the restricted period (which, for purposes of the short sale restrictions, generally is the five-day period prior to pricing).7 As part of FINRA’s program to monitor for member compliance with Regulation M, FINRA’s Market Regulation Department (the ‘‘Market Regulation Department’’) reviews members’ over-the-counter (‘‘OTC’’) trading and quoting activity for prohibited purchases and/or bids during the applicable restricted period and short sales during the five-day period prior to pricing the offering. FINRA rules must ensure that FINRA receives pertinent distribution-related information in a timely fashion to facilitate this component of FINRA’s Regulation M compliance program. FINRA’s current Regulation M-related rules comprise notice requirements set forth in NASD Rule 2710(b)(10) and (11) and Incorporated NYSE Rule 392 (Notification Requirements for Offerings of Listed Securities), as well as marketplace-specific requirements in the OTCBB and ADF rules. NASD Rule 2710(b)(10) requires members that are acting as manager (or in a similar capacity) of a distribution of unlisted securities that are considered a subject or reference security subject to Rule 101 of Regulation M or an ‘‘actively traded’’ security under Rule 101 of Regulation M to submit a request for an Underwriting Activity Report (‘‘UAR’’) from the Market Regulation Department. The request for a UAR, which is the mechanism by which FINRA currently receives notice of prospective distributions, must be submitted at the time a registration statement or similar offering document is filed with the 6 A ‘‘stabilizing bid’’ is a bid that is intended to maintain the price of the offered security and is necessary to prevent or retard a decline in the security’s price. A ‘‘penalty bid’’ allows a lead underwriter to reclaim a selling concession paid to a syndicate member if that member’s customers sell their allocated shares in the immediate aftermarket. A ‘‘syndicate covering transaction’’ is generally defined as placing a bid or effecting a purchase to reduce a syndicate short position. 7 See Exchange Act Release No. 56206 (August 6, 2007), 72 FR 45094 (August 10, 2007). PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 Corporate Financing Department, the SEC or other regulatory agency and if not filed with any regulatory agency, at least two business days prior to commencement of the restricted period. Such request must include a copy of the registration statement or similar offering document. If no member is acting as manager, then each member that is a distribution participant or affiliated purchaser shall submit the request for a UAR, unless another member has assumed responsibility for compliance. NASD Rule 2710(b)(11) requires members that are acting as manager (or in a similar capacity) of a distribution of securities that are listed on a national securities exchange and considered a subject security or reference security subject to Rule 101 of Regulation M or an ‘‘actively traded’’ security under Rule 101 of Regulation M to provide notice to the Market Regulation Department of the pricing of the distribution, including the date and time of pricing, the offering price and the time the distribution terminated. Such notice must be provided no later than the close of business the day the offering terminates and may be submitted on the UAR. Incorporated NYSE Rule 392(a) requires that Dual Members provide notice of pricing and related information (including the restricted period, if any, the offering price and the basis for pricing) in connection with an offering of an NYSE-listed security. Incorporated NYSE Rule 392(b) requires that Dual Members provide notice of syndicate covering transactions and penalty and stabilizing bids in connection with an offering of an NYSElisted security. FINRA’s OTCBB and ADF-related marketplace rules also include certain Regulation M-related requirements. Any member that is a distribution participant or affiliated purchaser in a distribution of an OTCBB-eligible security must provide notice to the Corporate Financing Department of its intention to impose a penalty bid or conduct a syndicate covering transaction pursuant to Rule 104 of Regulation M.8 In addition, members are required to withdraw their quotations in the OTCBB (in OTCBB-eligible securities) and the ADF (in NMS stocks) to comply with applicable restricted periods under Regulation M. Specifically, a member that is a distribution participant or affiliated purchaser in a distribution of an OTCBB-eligible security must withdraw its quotations in the offered security 9 and provide notice to FINRA’s Operations Department prior to 8 See 9 See E:\FR\FM\11AUN1.SGM NASD Rule 6540(d)(1)(D)(iii). NASD Rule 6540(d)(1)(D)(ii). 11AUN1 Federal Register / Vol. 73, No. 155 / Monday, August 11, 2008 / Notices pricing.10 The member must also provide notice to the Market Regulation Department upon the pricing of the distribution.11 Additionally, members are prohibited from entering stabilizing bids pursuant to Rule 104 of Regulation M in the OTCBB.12 With respect to quotations in the ADF, FINRA’s Operations Department may grant excused withdrawal status to a Registered Reporting ADF Market Maker, as defined in NASD Rule 4200A(a)(14), that is a distribution participant or affiliated purchaser in a distribution of an NMS stock in order to comply with the applicable restricted period under Regulation M.13 A member acting as manager (or in a similar capacity), or any member that is a distribution participant or affiliated purchaser in a distribution that does not have a manager, must notify FINRA’s ADF Operations and the Market Regulation Department of a prospective distribution and request a withdrawal of each market maker’s quotations.14 Members also must submit a written request to ADF Operations and the Market Regulation Department to rescind the market maker’s excused withdrawal status and provide notice of the date and time of the pricing of the offering, the offering price, and the time the offering terminated.15 rmajette on PRODPC74 with NOTICES Proposed New FINRA Rule 5190 To clarify and streamline FINRA’s rules in this area, FINRA is proposing to consolidate and house all Regulation M-related notice requirements in a single rule—proposed new FINRA Rule 5190 (Notification Requirements for Offering Participants). The scope of the current rules and information required would be expanded, as necessary, to impose consistent notice requirements relating to distributions of listed and unlisted securities. The proposed rule change would ensure that FINRA receives from its members pertinent distribution-related information in a timely fashion. Proposed Rule 5190(c) sets forth the notice requirements applicable to distributions of listed and unlisted securities that are ‘‘covered securities’’ (as that term is defined under Regulation M) subject to a restricted period under Rule 101 or 102 of Regulation M. Specifically, proposed Rule 5190(c)(1)(A) would require members to determine, in accordance 10 See NASD Rule 6540(d)(1)(D)(i). NASD Rule 6540(d)(1)(D)(iv). 12 See NASD Rule 6540(d)(1)(D)(ii). 13 See NASD Rule 4619A(f). 14 See NASD Rule 4619A(f)(1). 15 See NASD Rule 4619A(f)(3). 11 See VerDate Aug<31>2005 15:22 Aug 08, 2008 Jkt 214001 with Regulation M, whether a distribution is subject to a one-day or five-day restricted period under Rule 101 of Regulation M, and provide written notice to FINRA of the members’ determination and the basis for such determination.16 Additionally, pursuant to proposed Rule 5190(c)(1)(A), members would be required to include in the written notice the contemplated date and time of commencement of the restricted period, identifying the distribution participants and affiliated purchasers. Members would be required to provide such notice no later than the business day prior to the first complete trading session of the applicable restricted period, unless later notification is necessary under specific circumstances.17 FINRA notes that where the principal market closes early, e.g., for a holiday, the shortened session would constitute a complete trading session for purposes of the proposed Rule. NASD Rule 2710(b)(10) requires that notice be provided at the time of filing the registration statement. However, for some distributions, particularly shelf offerings, the registration statement may be filed well in advance of commencement of the distribution. As a result, by the time the distribution takes place, the information previously provided by the member could be out-of-date or the ADTV or public float levels could have changed, in which case a different restricted period would apply. The proposed rule change would eliminate the express requirement under FINRA rules that members request a UAR and would instead permit FINRA 16 While the proposed rule change would place the onus of determining the applicable restricted period on the member for all distributions, as a practical matter, FINRA would accept notification by a member that the maximum five-day restricted period applies to a prospective distribution, without providing the basis for that determination. If, on the other hand, a member were to assert that a one-day or no restricted period applied to a particular distribution, FINRA would require that the member demonstrate the basis for that determination. 17 In most instances, FINRA would expect to receive notification within the prescribed time frame, but may permit later notification in limited circumstances. Such determination would be made by the Market Regulation Department on a case-bycase basis. For example, there may be instances where the nature of the transaction has made it impossible to provide timely notice (e.g., a private investment in public equity (‘‘PIPE’’) offering is commenced and priced on the same day, and thus the member could not have provided notice on the business day prior to the first complete trading session of the applicable restricted period). Current NASD Rule 4619A(f)(1), which sets forth the notice and withdrawal of quotations requirements applicable to ADF participants for purposes of compliance with Regulation M, similarly contemplates later notification where necessary under the specific circumstances. PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 46659 to prescribe the form in which notice and the required information must be submitted to FINRA (including, as discussed above, notice of the member’s independent determination regarding whether a restricted period applies).18 The proposed rule change also would eliminate the requirement in NASD Rule 2710(b)(10) that members submit a copy of the registration statement. The Market Regulation Department does not rely on the registration statement in monitoring member quoting and trading activity for purposes of Regulation M compliance. Moreover, FINRA believes that this requirement could potentially suggest that the Regulation M-related requirements are applicable only to registered offerings when, in fact, certain unregistered offerings, e.g., private placements and PIPEs, are subject to Regulation M and FINRA’s notice requirements. Proposed Rule 5190(c)(1)(B) would require that upon pricing a distribution that is subject to a restricted period under Rule 101 of Regulation M, members provide written notice to FINRA and the following information: The security name and symbol, the type of security, the number of shares offered, the offering price, the last sale before the distribution, the pricing basis (e.g., the prior day closing price, a negotiated price, last sale, etc.), the SEC effective date and time, the trade date and the restricted period. Consistent with proposed paragraph (c)(1)(A), members also would be required to identify the distribution participants and affiliated purchasers. The notice under proposed Rule 5190(c)(1)(B) would be required to be submitted no later than the close of business the next business day following the pricing of the distribution, unless later notification is necessary under specific circumstances. NASD Rule 2710(b)(11) requires that notice of pricing be provided no later than the close of business the day the offering terminates; however, most members immediately provide notice of pricing today. In addition to being consistent 18 FINRA will announce the form and method of transmission in a Notice to be published on its Web site. For example, such form could include the request for a UAR in connection with distributions of Nasdaq-listed securities. Additionally, FINRA notes that the Market Regulation Department monitors for purposes of compliance with Regulation M on behalf of the Nasdaq Exchange pursuant to a Regulatory Services Agreement (RSA). The Market Regulation Department will continue to generate UARs on behalf of the Nasdaq Exchange under the RSA to assist firms in determining the applicable restricted period, as well as applicable Nasdaq passive market making limits, under Regulation M with respect to Nasdaq-listed securities pursuant to Nasdaq Exchange rules. E:\FR\FM\11AUN1.SGM 11AUN1 rmajette on PRODPC74 with NOTICES 46660 Federal Register / Vol. 73, No. 155 / Monday, August 11, 2008 / Notices with current practice, the proposed rule change would ensure that FINRA gets timely pricing information in instances where a distribution does not terminate for weeks or even months after pricing. Finally, proposed Rule 5190(c)(1)(C) would require that members provide written notice of the cancellation or postponement of any distribution for which prior notice of commencement of the restricted period has been provided to FINRA. Members would be required to provide such notice immediately upon the cancellation or postponement of the distribution. Proposed Rule 5190(c)(2) would require that any member that is an issuer or selling security holder in a distribution of any security that is a covered security subject to a restricted period under Rule 102 of Regulation M comply with the notice requirements of proposed Rule 5190(c)(1), unless another member has assumed responsibility in writing for compliance therewith. The proposed provision would ensure that FINRA receives notice of any distribution in which a member is participating as an issuer or selling security holder, to the extent that notice of such distribution has not already been provided under proposed Rule 5190. Proposed Rule 5190(d) sets forth the notice requirements applicable to distributions of listed and unlisted securities that are considered ‘‘actively traded’’ securities and thus are not subject to a restricted period under Rule 101 of Regulation M.19 In connection with such distributions, pursuant to proposed Rule 5190(d)(1), members would be required to provide written notice to FINRA of the member’s determination that no restricted period applies and the basis for such determination. Proposed Rule 5190(d)(1) would require that such notice be provided at least one business day prior to the pricing of the distribution, unless later notification is necessary under specific circumstances. Proposed Rule 5190(d)(2) would require that upon pricing a distribution of a security that is considered ‘‘actively traded’’ under Rule 101 of Regulation M, members provide written notice to FINRA and the same pricing-related information that would be required under proposed paragraph (c)(1)(B) (discussed above). Also consistent with proposed paragraph (c)(1)(B), proposed Rule 5190(d)(2) would require members to identify the distribution participants 19 The exclusion for ‘‘actively traded securities’’ removes from Rule 101 of Regulation M securities with an ADTV value of at least $1 million where the issuer’s common equity securities have a public float value of at least $150 million. VerDate Aug<31>2005 15:22 Aug 08, 2008 Jkt 214001 and affiliated purchasers, and provide the required notice no later than the close of business the next business day following the pricing of the distribution, unless later notification is necessary under specific circumstances.20 Under paragraphs (c)(1) and (d) of proposed Rule 5190, a member acting as manager (or in a similar capacity) of the distribution would have the obligation to submit the requisite notice to FINRA. However, if no member is acting as manager (or in a similar capacity), then each member that is a distribution participant or affiliated purchaser would be required to provide notice to FINRA, unless another FINRA member has assumed responsibility in writing for compliance with the notice requirement. This is consistent with the current approach under NASD Rule 2710(b)(10).21 Finally, proposed Rule 5190(e) would require members to provide notice to FINRA of penalty bids or syndicate covering transactions in connection with an offering of an OTC Equity Security. Members would be required to provide notice to FINRA of their intention to conduct such activity, prior to imposing the penalty bid or engaging in the first syndicate covering transaction, as well as pertinent information, such as identification of the security and its symbol and the date such activity will occur. In addition, members would be required to subsequently confirm such activity within one business day of completion, including identification of the security and its symbol, the total number of shares and the date(s) of such activity. The proposed provision is substantially similar to NASD Rule 6540(d)(1)(D)(iii). By including these notice requirements in proposed Rule 5190, the proposed rule change would clarify that they apply to distributions of all OTC Equity Securities and are not limited to distributions of OTCBB-eligible securities. In light of the foregoing, FINRA is proposing to delete paragraphs (b)(10) and (11) from NASD Rule 2710 and Incorporated NYSE Rule 392 in its entirety. The notice requirements of NASD Rule 2710(b)(10) and (11) and Incorporated NYSE Rule 392(a) largely would be incorporated in proposed Rule 20 FINRA notes that a member that is an issuer or selling security holder in a distribution of an actively traded security that is subject to a restricted period under Rule 102 of Regulation M would be required to comply with the notice requirements under proposed Rule 5190(c)(2). 21 Members would be required to update the notice required under the proposed Rule, as necessary (e.g., a manager would update the notice where distribution participants are added after commencement of the restricted period). PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 5190. Because Incorporated NYSE Rule 392(b) is specific to the NYSE marketplace, FINRA is not proposing that these requirements become part of the Consolidated FINRA Rulebook. Proposed Amendments to Marketplace Rules FINRA also is proposing to clarify the scope and application of the Regulation M-related requirements that are in the current OTCBB and ADF marketplace rules.22 FINRA is proposing to adopt new FINRA Rule 6470 (Withdrawal of Quotations in an OTC Equity Security in Compliance with SEC Regulation M), which would (1) require a member that is a distribution participant, affiliated purchaser, selling security holder or issuer in a distribution of an OTC Equity Security that is a covered security subject to Rule 101 or Rule 102 of Regulation M to withdraw all quotations in the security during the restricted period; and (2) prohibit the entry of stabilizing bids for the OTC Equity Security pursuant to Rule 104 of Regulation M. Proposed Rule 6470 is substantially similar to NASD Rule 6540(d)(1)(D)(ii) and would clarify that the requirements apply not only to OTCBB-eligible securities, but to all OTC Equity Securities quoted in any inter-dealer quotation system (i.e., OTCBB and Pink Sheets). Thus, under the proposed rule change, the Regulation M-related provisions would be deleted from the OTCBB rules (specifically, paragraphs (d)(1)(D), (E) and (F) would be deleted from NASD Rule 6540) and comparable requirements would be housed in either proposed Rule 5190, as discussed above, or proposed Rule 6470. Second, FINRA is proposing to make certain conforming changes to the Regulation M-related rules applicable to the ADF. Specifically, FINRA is proposing to amend NASD Rule 4619A(f) to conform to the language and structure of proposed Rule 6470. Thus, a Registered Reporting ADF Market 22 On May 23, 2008, FINRA filed proposed rule change SR–FINRA–2008–021, in which FINRA proposes, among other things, to adopt NASD Marketplace Rules 4200A, 4619A and 6540 as FINRA Rules 6220, 6275 and 6540, respectively, and the NASD Rule 6600 Series as the FINRA Rule 6400 Series, without material change, in the Consolidated FINRA Rulebook. Assuming Commission approval of SR–FINRA–2008–021 prior to the approval of this proposed rule change, FINRA will amend this filing, as necessary, to reflect such approval. The Staff of the Commission (‘‘Staff’’) also notes that FINRA has filed two other proposals related to NASD Rule 2710 previously (SR–NASD–2004–022 and SR–FINRA–2007–009) that are outstanding. The Staff has confirmed with FINRA that they will amend those filings to reflect the movement of NASD Rule 2710 to the Consolidated FINRA Rulebook. E:\FR\FM\11AUN1.SGM 11AUN1 Federal Register / Vol. 73, No. 155 / Monday, August 11, 2008 / Notices Maker that is a distribution participant, affiliated purchaser, selling security holder or issuer in a distribution of an NMS stock that is a covered security subject to Rule 101 or 102 of Regulation M would be required to request an excused withdrawal of its quotations in the ADF in the offered security. FINRA believes that it is more appropriate to impose such obligation on the member that is posting the quotation, rather than require the manager of the distribution to do so on behalf of each member. FINRA also is proposing to amend NASD Rule 4200A, which sets forth the definitions applicable to the ADF rules, to make technical and conforming changes such as adding necessary references to Regulation M and deleting definitions that are currently not used in the ADF rules. FINRA believes that the proposed rule change will significantly improve the clarity of the current rules and enhance the information FINRA receives, which will better enable FINRA to monitor member OTC quoting and trading for purposes of Regulation M compliance. FINRA will announce the implementation date of the proposed rule change in a Regulatory Notice to be published no later than 60 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,23 which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. The rules being adopted as part of the Consolidated FINRA Rulebook previously have been found to meet the statutory requirements, and FINRA believes that those rules have since proven effective in achieving the statutory mandates. In addition, FINRA believes that the proposed rule change will significantly improve the clarity of FINRA’s current Regulation M-related rules and enhance FINRA’s ability to monitor member OTC quoting and trading for purposes of Regulation M compliance. rmajette on PRODPC74 with NOTICES 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. 23 15 U.S.C. 78o–3(b)(6). VerDate Aug<31>2005 15:22 Aug 08, 2008 Jkt 214001 C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 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 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 (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number insert SR–FINRA–2008–039 on the subject line. Paper Comments • Send paper comments in triplicate to Florence Harmon, Acting Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–FINRA–2008–039. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 46661 those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FINRA–2008–039 and should be submitted on or before September 2, 2008. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.24 Florence Harmon, Acting Secretary. [FR Doc. E8–18371 Filed 8–8–08; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–58291; File No. SR–FINRA– 2008–043] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Establish a Membership Waive-In Process and Fee Waiver for Certain NYSE Alternext U.S. LLC Member Organizations August 1, 2008. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on July 30, 2008, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) (f/k/a National Association of Securities Dealers, Inc. (‘‘NASD’’)) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 24 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\11AUN1.SGM 11AUN1

Agencies

[Federal Register Volume 73, Number 155 (Monday, August 11, 2008)]
[Notices]
[Pages 46657-46661]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-18371]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58302; File No. SR-FINRA-2008-039]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
FINRA Rules 5110 (Corporate Financing Rule), 5190 (Notification 
Requirements for Offering Participants) and 6470 (Withdrawal of 
Quotations in an OTC Equity Security in Compliance With SEC Regulation 
M) in the Consolidated FINRA Rulebook

August 4, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 16, 2008, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to (1) adopt NASD Rule 2710, without material 
change except for paragraphs (b)(10) and (11), as a FINRA rule in the 
consolidated FINRA rulebook; and (2) clarify and streamline the notice 
and other requirements in FINRA rules relating to Regulation M under 
the Act (including paragraphs (b)(10) and (11) of NASD Rule 2710 and 
paragraph (a) of Incorporated NYSE Rule 392). The proposed rule change 
would renumber NASD Rule 2710 as FINRA Rule 5110 and adopt new FINRA 
Rules 5190 and 6470 in the consolidated FINRA rulebook.
    The text of the proposed rule change is available at FINRA, on 
FINRA's Web site at http://www.finra.org, and in 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.

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 the new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\3\ FINRA is proposing to (1) adopt 
NASD Rule 2710 as FINRA Rule 5110, with the exception of paragraphs 
(b)(10) and (11); (2) adopt new FINRA Rule 5190, which would house the 
Regulation M-related notice requirements applicable to members 
participating in securities offerings (including paragraphs (b)(10) and 
(11) of NASD Rule 2710 and paragraph (a) of Incorporated NYSE Rule 
392); (3) adopt new FINRA Rule 6470, which would house certain 
Regulation M-related requirements that are currently in the OTC 
Bulletin Board (``OTCBB'') rules and would apply to all OTC Equity 
Securities;\4\ and (4) make conforming amendments to the Regulation M-
related rules applicable to the Alternative Display Facility (``ADF'').
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    \3\ The current FINRA rulebook consists of two sets of rules: 
(1) NASD Rules and (2) rules incorporated from NYSE (``Incorporated 
NYSE Rules'') (together referred to as the ``Transitional 
Rulebook''). The Incorporated NYSE Rules apply only to those members 
of FINRA that are also members of the NYSE (``Dual Members''). Dual 
Members also must comply with NASD Rules. For more information about 
the rulebook consolidation process, see FINRA Information Notice, 
March 12, 2008 (Rulebook Consolidation Process).
    \4\ NASD Rule 6610(d) defines OTC Equity Security as ``any non-
exchange-listed security and certain exchange-listed securities that 
do not otherwise qualify for real-time trade reporting.''
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Corporate Financing Rule

    NASD Rule 2710 (Corporate Financing Rule), except paragraphs 
(b)(10) and (11) (which are discussed below), regulates the 
underwriting terms

[[Page 46658]]

and arrangements of most public offerings, including shelf offerings, 
of securities sold through FINRA members. The Rule requires members to 
file with FINRA's Corporate Financing Department (the ``Corporate 
Financing Department'') information regarding initial public offerings 
and certain secondary offerings and to submit pertinent documentation, 
including registration statements. The Corporate Financing Department 
reviews this information prior to commencement of the offering to 
determine whether the underwriting compensation and other terms and 
arrangements meet the requirements of applicable FINRA rules. Members 
are required to receive the Corporate Financing Department's opinion of 
no-objections to the offering terms prior to participating in the 
offering.
    FINRA is proposing to adopt NASD Rule 2710 as FINRA Rule 5110 in 
the Consolidated FINRA Rulebook. With the exception of the deletion of 
paragraphs (b)(10) and (11), as discussed below, FINRA is proposing to 
make only technical non-substantive changes to the Rule, such as 
replacing references to NASD or the Association with FINRA, and certain 
conforming changes to references in the Rule to, e.g., the Exchange 
Act, SEA Rules, the Securities Act and Securities Act Rules.

Regulation M-Related Requirements

Background and Discussion of Current FINRA Rules
    Regulation M is designed to prevent manipulation by persons with an 
interest in the outcome of an offering and generally prohibits 
activities and conduct that could artificially influence the market for 
an offered security.\5\ In this regard, Regulation M generally 
prohibits underwriters, broker-dealers, issuers and other persons 
participating in a distribution from directly or indirectly bidding for 
or purchasing the offered security (or inducing another person to do 
so) during the ``restricted period,'' which commences on the later of 
either one or five business days prior to the determination of the 
offering price or such time that a person becomes a distribution 
participant. For purposes of determining whether a one or five-day or 
no restricted period applies under Regulation M, the SEC has adopted a 
dual standard of world-wide average daily trading volume (``ADTV'') and 
public float value. Regulation M also governs certain market 
activities, usually undertaken by the managing underwriter or 
underwriting group (i.e., stabilizing bids, syndicate covering 
transactions and penalty bids) \6\ in connection with an offering and 
requires that notice of such activity be provided to the relevant self-
regulatory organization or, in the case of stabilizing bids, the market 
where the stabilizing bid is to be posted. Finally, Regulation M 
generally prohibits any person from selling short a security that is 
the subject of a public offering and purchasing the security in the 
offering if such short sale was effected during the restricted period 
(which, for purposes of the short sale restrictions, generally is the 
five-day period prior to pricing).\7\
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    \5\ See Exchange Act Release No. 38067 (December 20, 1996), 62 
FR 520 (January 3, 1997).
    \6\ A ``stabilizing bid'' is a bid that is intended to maintain 
the price of the offered security and is necessary to prevent or 
retard a decline in the security's price. A ``penalty bid'' allows a 
lead underwriter to reclaim a selling concession paid to a syndicate 
member if that member's customers sell their allocated shares in the 
immediate aftermarket. A ``syndicate covering transaction'' is 
generally defined as placing a bid or effecting a purchase to reduce 
a syndicate short position.
    \7\ See Exchange Act Release No. 56206 (August 6, 2007), 72 FR 
45094 (August 10, 2007).
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    As part of FINRA's program to monitor for member compliance with 
Regulation M, FINRA's Market Regulation Department (the ``Market 
Regulation Department'') reviews members' over-the-counter (``OTC'') 
trading and quoting activity for prohibited purchases and/or bids 
during the applicable restricted period and short sales during the 
five-day period prior to pricing the offering. FINRA rules must ensure 
that FINRA receives pertinent distribution-related information in a 
timely fashion to facilitate this component of FINRA's Regulation M 
compliance program.
    FINRA's current Regulation M-related rules comprise notice 
requirements set forth in NASD Rule 2710(b)(10) and (11) and 
Incorporated NYSE Rule 392 (Notification Requirements for Offerings of 
Listed Securities), as well as marketplace-specific requirements in the 
OTCBB and ADF rules. NASD Rule 2710(b)(10) requires members that are 
acting as manager (or in a similar capacity) of a distribution of 
unlisted securities that are considered a subject or reference security 
subject to Rule 101 of Regulation M or an ``actively traded'' security 
under Rule 101 of Regulation M to submit a request for an Underwriting 
Activity Report (``UAR'') from the Market Regulation Department. The 
request for a UAR, which is the mechanism by which FINRA currently 
receives notice of prospective distributions, must be submitted at the 
time a registration statement or similar offering document is filed 
with the Corporate Financing Department, the SEC or other regulatory 
agency and if not filed with any regulatory agency, at least two 
business days prior to commencement of the restricted period. Such 
request must include a copy of the registration statement or similar 
offering document. If no member is acting as manager, then each member 
that is a distribution participant or affiliated purchaser shall submit 
the request for a UAR, unless another member has assumed responsibility 
for compliance.
    NASD Rule 2710(b)(11) requires members that are acting as manager 
(or in a similar capacity) of a distribution of securities that are 
listed on a national securities exchange and considered a subject 
security or reference security subject to Rule 101 of Regulation M or 
an ``actively traded'' security under Rule 101 of Regulation M to 
provide notice to the Market Regulation Department of the pricing of 
the distribution, including the date and time of pricing, the offering 
price and the time the distribution terminated. Such notice must be 
provided no later than the close of business the day the offering 
terminates and may be submitted on the UAR.
    Incorporated NYSE Rule 392(a) requires that Dual Members provide 
notice of pricing and related information (including the restricted 
period, if any, the offering price and the basis for pricing) in 
connection with an offering of an NYSE-listed security. Incorporated 
NYSE Rule 392(b) requires that Dual Members provide notice of syndicate 
covering transactions and penalty and stabilizing bids in connection 
with an offering of an NYSE-listed security.
    FINRA's OTCBB and ADF-related marketplace rules also include 
certain Regulation M-related requirements. Any member that is a 
distribution participant or affiliated purchaser in a distribution of 
an OTCBB-eligible security must provide notice to the Corporate 
Financing Department of its intention to impose a penalty bid or 
conduct a syndicate covering transaction pursuant to Rule 104 of 
Regulation M.\8\
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    \8\ See NASD Rule 6540(d)(1)(D)(iii).
---------------------------------------------------------------------------

    In addition, members are required to withdraw their quotations in 
the OTCBB (in OTCBB-eligible securities) and the ADF (in NMS stocks) to 
comply with applicable restricted periods under Regulation M. 
Specifically, a member that is a distribution participant or affiliated 
purchaser in a distribution of an OTCBB-eligible security must withdraw 
its quotations in the offered security \9\ and provide notice to 
FINRA's Operations Department prior to

[[Page 46659]]

pricing.\10\ The member must also provide notice to the Market 
Regulation Department upon the pricing of the distribution.\11\ 
Additionally, members are prohibited from entering stabilizing bids 
pursuant to Rule 104 of Regulation M in the OTCBB.\12\
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    \9\ See NASD Rule 6540(d)(1)(D)(ii).
    \10\ See NASD Rule 6540(d)(1)(D)(i).
    \11\ See NASD Rule 6540(d)(1)(D)(iv).
    \12\ See NASD Rule 6540(d)(1)(D)(ii).
---------------------------------------------------------------------------

    With respect to quotations in the ADF, FINRA's Operations 
Department may grant excused withdrawal status to a Registered 
Reporting ADF Market Maker, as defined in NASD Rule 4200A(a)(14), that 
is a distribution participant or affiliated purchaser in a distribution 
of an NMS stock in order to comply with the applicable restricted 
period under Regulation M.\13\ A member acting as manager (or in a 
similar capacity), or any member that is a distribution participant or 
affiliated purchaser in a distribution that does not have a manager, 
must notify FINRA's ADF Operations and the Market Regulation Department 
of a prospective distribution and request a withdrawal of each market 
maker's quotations.\14\ Members also must submit a written request to 
ADF Operations and the Market Regulation Department to rescind the 
market maker's excused withdrawal status and provide notice of the date 
and time of the pricing of the offering, the offering price, and the 
time the offering terminated.\15\
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    \13\ See NASD Rule 4619A(f).
    \14\ See NASD Rule 4619A(f)(1).
    \15\ See NASD Rule 4619A(f)(3).
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Proposed New FINRA Rule 5190

    To clarify and streamline FINRA's rules in this area, FINRA is 
proposing to consolidate and house all Regulation M-related notice 
requirements in a single rule--proposed new FINRA Rule 5190 
(Notification Requirements for Offering Participants). The scope of the 
current rules and information required would be expanded, as necessary, 
to impose consistent notice requirements relating to distributions of 
listed and unlisted securities. The proposed rule change would ensure 
that FINRA receives from its members pertinent distribution-related 
information in a timely fashion.
    Proposed Rule 5190(c) sets forth the notice requirements applicable 
to distributions of listed and unlisted securities that are ``covered 
securities'' (as that term is defined under Regulation M) subject to a 
restricted period under Rule 101 or 102 of Regulation M. Specifically, 
proposed Rule 5190(c)(1)(A) would require members to determine, in 
accordance with Regulation M, whether a distribution is subject to a 
one-day or five-day restricted period under Rule 101 of Regulation M, 
and provide written notice to FINRA of the members' determination and 
the basis for such determination.\16\ Additionally, pursuant to 
proposed Rule 5190(c)(1)(A), members would be required to include in 
the written notice the contemplated date and time of commencement of 
the restricted period, identifying the distribution participants and 
affiliated purchasers.
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    \16\ While the proposed rule change would place the onus of 
determining the applicable restricted period on the member for all 
distributions, as a practical matter, FINRA would accept 
notification by a member that the maximum five-day restricted period 
applies to a prospective distribution, without providing the basis 
for that determination. If, on the other hand, a member were to 
assert that a one-day or no restricted period applied to a 
particular distribution, FINRA would require that the member 
demonstrate the basis for that determination.
---------------------------------------------------------------------------

    Members would be required to provide such notice no later than the 
business day prior to the first complete trading session of the 
applicable restricted period, unless later notification is necessary 
under specific circumstances.\17\ FINRA notes that where the principal 
market closes early, e.g., for a holiday, the shortened session would 
constitute a complete trading session for purposes of the proposed 
Rule. NASD Rule 2710(b)(10) requires that notice be provided at the 
time of filing the registration statement. However, for some 
distributions, particularly shelf offerings, the registration statement 
may be filed well in advance of commencement of the distribution. As a 
result, by the time the distribution takes place, the information 
previously provided by the member could be out-of-date or the ADTV or 
public float levels could have changed, in which case a different 
restricted period would apply.
---------------------------------------------------------------------------

    \17\ In most instances, FINRA would expect to receive 
notification within the prescribed time frame, but may permit later 
notification in limited circumstances. Such determination would be 
made by the Market Regulation Department on a case-by-case basis. 
For example, there may be instances where the nature of the 
transaction has made it impossible to provide timely notice (e.g., a 
private investment in public equity (``PIPE'') offering is commenced 
and priced on the same day, and thus the member could not have 
provided notice on the business day prior to the first complete 
trading session of the applicable restricted period). Current NASD 
Rule 4619A(f)(1), which sets forth the notice and withdrawal of 
quotations requirements applicable to ADF participants for purposes 
of compliance with Regulation M, similarly contemplates later 
notification where necessary under the specific circumstances.
---------------------------------------------------------------------------

    The proposed rule change would eliminate the express requirement 
under FINRA rules that members request a UAR and would instead permit 
FINRA to prescribe the form in which notice and the required 
information must be submitted to FINRA (including, as discussed above, 
notice of the member's independent determination regarding whether a 
restricted period applies).\18\ The proposed rule change also would 
eliminate the requirement in NASD Rule 2710(b)(10) that members submit 
a copy of the registration statement. The Market Regulation Department 
does not rely on the registration statement in monitoring member 
quoting and trading activity for purposes of Regulation M compliance. 
Moreover, FINRA believes that this requirement could potentially 
suggest that the Regulation M-related requirements are applicable only 
to registered offerings when, in fact, certain unregistered offerings, 
e.g., private placements and PIPEs, are subject to Regulation M and 
FINRA's notice requirements.
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    \18\ FINRA will announce the form and method of transmission in 
a Notice to be published on its Web site. For example, such form 
could include the request for a UAR in connection with distributions 
of Nasdaq-listed securities.
    Additionally, FINRA notes that the Market Regulation Department 
monitors for purposes of compliance with Regulation M on behalf of 
the Nasdaq Exchange pursuant to a Regulatory Services Agreement 
(RSA). The Market Regulation Department will continue to generate 
UARs on behalf of the Nasdaq Exchange under the RSA to assist firms 
in determining the applicable restricted period, as well as 
applicable Nasdaq passive market making limits, under Regulation M 
with respect to Nasdaq-listed securities pursuant to Nasdaq Exchange 
rules.
---------------------------------------------------------------------------

    Proposed Rule 5190(c)(1)(B) would require that upon pricing a 
distribution that is subject to a restricted period under Rule 101 of 
Regulation M, members provide written notice to FINRA and the following 
information: The security name and symbol, the type of security, the 
number of shares offered, the offering price, the last sale before the 
distribution, the pricing basis (e.g., the prior day closing price, a 
negotiated price, last sale, etc.), the SEC effective date and time, 
the trade date and the restricted period. Consistent with proposed 
paragraph (c)(1)(A), members also would be required to identify the 
distribution participants and affiliated purchasers.
    The notice under proposed Rule 5190(c)(1)(B) would be required to 
be submitted no later than the close of business the next business day 
following the pricing of the distribution, unless later notification is 
necessary under specific circumstances. NASD Rule 2710(b)(11) requires 
that notice of pricing be provided no later than the close of business 
the day the offering terminates; however, most members immediately 
provide notice of pricing today. In addition to being consistent

[[Page 46660]]

with current practice, the proposed rule change would ensure that FINRA 
gets timely pricing information in instances where a distribution does 
not terminate for weeks or even months after pricing.
    Finally, proposed Rule 5190(c)(1)(C) would require that members 
provide written notice of the cancellation or postponement of any 
distribution for which prior notice of commencement of the restricted 
period has been provided to FINRA. Members would be required to provide 
such notice immediately upon the cancellation or postponement of the 
distribution.
    Proposed Rule 5190(c)(2) would require that any member that is an 
issuer or selling security holder in a distribution of any security 
that is a covered security subject to a restricted period under Rule 
102 of Regulation M comply with the notice requirements of proposed 
Rule 5190(c)(1), unless another member has assumed responsibility in 
writing for compliance therewith. The proposed provision would ensure 
that FINRA receives notice of any distribution in which a member is 
participating as an issuer or selling security holder, to the extent 
that notice of such distribution has not already been provided under 
proposed Rule 5190.
    Proposed Rule 5190(d) sets forth the notice requirements applicable 
to distributions of listed and unlisted securities that are considered 
``actively traded'' securities and thus are not subject to a restricted 
period under Rule 101 of Regulation M.\19\ In connection with such 
distributions, pursuant to proposed Rule 5190(d)(1), members would be 
required to provide written notice to FINRA of the member's 
determination that no restricted period applies and the basis for such 
determination. Proposed Rule 5190(d)(1) would require that such notice 
be provided at least one business day prior to the pricing of the 
distribution, unless later notification is necessary under specific 
circumstances.
---------------------------------------------------------------------------

    \19\ The exclusion for ``actively traded securities'' removes 
from Rule 101 of Regulation M securities with an ADTV value of at 
least $1 million where the issuer's common equity securities have a 
public float value of at least $150 million.
---------------------------------------------------------------------------

    Proposed Rule 5190(d)(2) would require that upon pricing a 
distribution of a security that is considered ``actively traded'' under 
Rule 101 of Regulation M, members provide written notice to FINRA and 
the same pricing-related information that would be required under 
proposed paragraph (c)(1)(B) (discussed above). Also consistent with 
proposed paragraph (c)(1)(B), proposed Rule 5190(d)(2) would require 
members to identify the distribution participants and affiliated 
purchasers, and provide the required notice no later than the close of 
business the next business day following the pricing of the 
distribution, unless later notification is necessary under specific 
circumstances.\20\
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    \20\ FINRA notes that a member that is an issuer or selling 
security holder in a distribution of an actively traded security 
that is subject to a restricted period under Rule 102 of Regulation 
M would be required to comply with the notice requirements under 
proposed Rule 5190(c)(2).
---------------------------------------------------------------------------

    Under paragraphs (c)(1) and (d) of proposed Rule 5190, a member 
acting as manager (or in a similar capacity) of the distribution would 
have the obligation to submit the requisite notice to FINRA. However, 
if no member is acting as manager (or in a similar capacity), then each 
member that is a distribution participant or affiliated purchaser would 
be required to provide notice to FINRA, unless another FINRA member has 
assumed responsibility in writing for compliance with the notice 
requirement. This is consistent with the current approach under NASD 
Rule 2710(b)(10).\21\
---------------------------------------------------------------------------

    \21\ Members would be required to update the notice required 
under the proposed Rule, as necessary (e.g., a manager would update 
the notice where distribution participants are added after 
commencement of the restricted period).
---------------------------------------------------------------------------

    Finally, proposed Rule 5190(e) would require members to provide 
notice to FINRA of penalty bids or syndicate covering transactions in 
connection with an offering of an OTC Equity Security. Members would be 
required to provide notice to FINRA of their intention to conduct such 
activity, prior to imposing the penalty bid or engaging in the first 
syndicate covering transaction, as well as pertinent information, such 
as identification of the security and its symbol and the date such 
activity will occur. In addition, members would be required to 
subsequently confirm such activity within one business day of 
completion, including identification of the security and its symbol, 
the total number of shares and the date(s) of such activity. The 
proposed provision is substantially similar to NASD Rule 
6540(d)(1)(D)(iii). By including these notice requirements in proposed 
Rule 5190, the proposed rule change would clarify that they apply to 
distributions of all OTC Equity Securities and are not limited to 
distributions of OTCBB-eligible securities.
    In light of the foregoing, FINRA is proposing to delete paragraphs 
(b)(10) and (11) from NASD Rule 2710 and Incorporated NYSE Rule 392 in 
its entirety. The notice requirements of NASD Rule 2710(b)(10) and (11) 
and Incorporated NYSE Rule 392(a) largely would be incorporated in 
proposed Rule 5190. Because Incorporated NYSE Rule 392(b) is specific 
to the NYSE marketplace, FINRA is not proposing that these requirements 
become part of the Consolidated FINRA Rulebook.
Proposed Amendments to Marketplace Rules
    FINRA also is proposing to clarify the scope and application of the 
Regulation M-related requirements that are in the current OTCBB and ADF 
marketplace rules.\22\ FINRA is proposing to adopt new FINRA Rule 6470 
(Withdrawal of Quotations in an OTC Equity Security in Compliance with 
SEC Regulation M), which would (1) require a member that is a 
distribution participant, affiliated purchaser, selling security holder 
or issuer in a distribution of an OTC Equity Security that is a covered 
security subject to Rule 101 or Rule 102 of Regulation M to withdraw 
all quotations in the security during the restricted period; and (2) 
prohibit the entry of stabilizing bids for the OTC Equity Security 
pursuant to Rule 104 of Regulation M. Proposed Rule 6470 is 
substantially similar to NASD Rule 6540(d)(1)(D)(ii) and would clarify 
that the requirements apply not only to OTCBB-eligible securities, but 
to all OTC Equity Securities quoted in any inter-dealer quotation 
system (i.e., OTCBB and Pink Sheets). Thus, under the proposed rule 
change, the Regulation M-related provisions would be deleted from the 
OTCBB rules (specifically, paragraphs (d)(1)(D), (E) and (F) would be 
deleted from NASD Rule 6540) and comparable requirements would be 
housed in either proposed Rule 5190, as discussed above, or proposed 
Rule 6470.
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    \22\ On May 23, 2008, FINRA filed proposed rule change SR-FINRA-
2008-021, in which FINRA proposes, among other things, to adopt NASD 
Marketplace Rules 4200A, 4619A and 6540 as FINRA Rules 6220, 6275 
and 6540, respectively, and the NASD Rule 6600 Series as the FINRA 
Rule 6400 Series, without material change, in the Consolidated FINRA 
Rulebook. Assuming Commission approval of SR-FINRA-2008-021 prior to 
the approval of this proposed rule change, FINRA will amend this 
filing, as necessary, to reflect such approval.
    The Staff of the Commission (``Staff'') also notes that FINRA 
has filed two other proposals related to NASD Rule 2710 previously 
(SR-NASD-2004-022 and SR-FINRA-2007-009) that are outstanding. The 
Staff has confirmed with FINRA that they will amend those filings to 
reflect the movement of NASD Rule 2710 to the Consolidated FINRA 
Rulebook.
---------------------------------------------------------------------------

    Second, FINRA is proposing to make certain conforming changes to 
the Regulation M-related rules applicable to the ADF. Specifically, 
FINRA is proposing to amend NASD Rule 4619A(f) to conform to the 
language and structure of proposed Rule 6470. Thus, a Registered 
Reporting ADF Market

[[Page 46661]]

Maker that is a distribution participant, affiliated purchaser, selling 
security holder or issuer in a distribution of an NMS stock that is a 
covered security subject to Rule 101 or 102 of Regulation M would be 
required to request an excused withdrawal of its quotations in the ADF 
in the offered security. FINRA believes that it is more appropriate to 
impose such obligation on the member that is posting the quotation, 
rather than require the manager of the distribution to do so on behalf 
of each member. FINRA also is proposing to amend NASD Rule 4200A, which 
sets forth the definitions applicable to the ADF rules, to make 
technical and conforming changes such as adding necessary references to 
Regulation M and deleting definitions that are currently not used in 
the ADF rules.
    FINRA believes that the proposed rule change will significantly 
improve the clarity of the current rules and enhance the information 
FINRA receives, which will better enable FINRA to monitor member OTC 
quoting and trading for purposes of Regulation M compliance.
    FINRA will announce the implementation date of the proposed rule 
change in a Regulatory Notice to be published no later than 60 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,\23\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. The rules being adopted as part of the Consolidated 
FINRA Rulebook previously have been found to meet the statutory 
requirements, and FINRA believes that those rules have since proven 
effective in achieving the statutory mandates. In addition, FINRA 
believes that the proposed rule change will significantly improve the 
clarity of FINRA's current Regulation M-related rules and enhance 
FINRA's ability to monitor member OTC quoting and trading for purposes 
of Regulation M compliance.

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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action
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    \23\ 15 U.S.C. 78o-3(b)(6).
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    Within 35 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 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 (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number insert SR-FINRA-2008-039 on the subject line.

Paper Comments

     Send paper comments in triplicate to Florence Harmon, 
Acting Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2008-039. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2008-039 and should be 
submitted on or before September 2, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Florence Harmon,
Acting Secretary.
 [FR Doc. E8-18371 Filed 8-8-08; 8:45 am]
BILLING CODE 8010-01-P