Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving the 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, 54190-54193 [E8-21760]

Download as PDF 54190 Federal Register / Vol. 73, No. 182 / Thursday, September 18, 2008 / Notices Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving the 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 (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 Over-the-counter (‘‘OTC’’) Bulletin Board (‘‘OTCBB’’) rules and would apply to all OTC Equity Securities; 5 and (4) make conforming amendments to the Regulation Mrelated rules applicable to the ADF. September 11, 2008. A. Corporate Financing Rule I. Introduction On July 16, 2008, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) (f/k/a National Association of Securities Dealers, Inc. (‘‘NASD’’)) filed with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’ or ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposal to adopt most of NASD Rule 2710 (Corporate Financing Rule) as FINRA Rule 5110 in the consolidated FINRA rulebook, consolidating the rules in FINRA’s jurisdiction relating to Regulation M as new Rules 5190 and 6470 in the consolidated FINRA rulebook, and make conforming changes to the rules related to Regulation M applicable to the Alternative Display Facility (‘‘ADF’’). This proposal was published for comment in the Federal Register on August 11, 2008.3 The Commission received no comments on the proposal. This order approves this proposed rule change. NASD Rule 2710, except paragraphs (b)(10) and (11) (which are discussed below), regulates the underwriting terms and arrangements of most public offerings (including shelf offerings) of securities sold through FINRA members. NASD Rule 2710 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 proposed 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 proposed to make only technical non-substantive changes to Rule 2710 such as replacing references to ‘‘NASD’’ or ‘‘the Association’’ with ‘‘FINRA’’ and certain conforming changes to references in Rule 2710 to, e.g., the Exchange Act, SEA Rules, the Securities Act and Securities Act Rules. SECURITIES AND EXCHANGE COMMISSION [Release No. 34–58514; File No. SR–FINRA– 2008–039] II. Description of the Proposed Rule Change As part of the process of developing the new consolidated rulebook (‘‘Consolidated FINRA Rulebook’’),4 FINRA is proposing to (1) adopt NASD Rule 2710 as FINRA Rule 5110, with the exception of paragraphs (b)(10) and (11); 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Securities Exchange Act Release No. 58302 (August 4, 2008), 73 FR 46657 (August 11, 2008) (SR–FINRA–2008–039). 4 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). dwashington3 on PRODPC61 with NOTICES 2 17 VerDate Aug<31>2005 15:26 Sep 17, 2008 Jkt 214001 B. Regulation M-Related Requirements 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 5 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.’’ PO 00000 Frm 00057 Fmt 4703 Sfmt 4703 the market for an offered security.6 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.7 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 the managing underwriter or underwriting group (i.e., stabilizing bids, syndicate covering transactions and penalty bids) 8 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).9 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’ OTC trading and quoting activity for prohibited purchases and/or bids during the applicable restricted period and short sales during the fiveday 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. 1. Existing FINRA Rules 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 6 See Securities Exchange Act Release No. 38067 (December 20, 1996), 62 FR 520 (January 3, 1997). 7 17 CFR 242.100, definition of ‘‘restricted period.’’ 8 17 CFR 242.100, definitions of ‘‘stabilizing,’’ ‘‘syndicate covering transaction,’’ and ‘‘penalty bid.’’ 9 See Securities Exchange Act Release No. 56206 (August 6, 2007), 72 FR 45094 (August 10, 2007). E:\FR\FM\18SEN1.SGM 18SEN1 dwashington3 on PRODPC61 with NOTICES Federal Register / Vol. 73, No. 182 / Thursday, September 18, 2008 / Notices (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 Commission, 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 bids 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 VerDate Aug<31>2005 15:26 Sep 17, 2008 Jkt 214001 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.10 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,11 and provide notice to FINRA’s Operations Department prior to pricing.12 The member must also provide notice to the Market Regulation Department upon the pricing of the distribution.13 Additionally, members are prohibited from entering stabilizing bids pursuant to Rule 104 of Regulation M in the OTCBB.14 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.15 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.16 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.17 2. Proposed New FINRA Rule 5190 FINRA proposed to consolidate and house all of its 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 10 See NASD Rule 6540(d)(1)(D)(iii). NASD Rule 6540(d)(1)(D)(ii). 12 See NASD Rule 6540(d)(1)(D)(i). 13 See NASD Rule 6540(d)(1)(D)(iv). 14 See NASD Rule 6540(d)(1)(D)(ii). 15 See NASD Rule 4619A(f). 16 See NASD Rule 4619A(f)(1). 17 See NASD Rule 4619A(f)(3). 11 See PO 00000 Frm 00058 Fmt 4703 Sfmt 4703 54191 be expanded, as necessary, to impose consistent notice requirements relating to distributions of listed and unlisted securities. FINRA believes that 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’’ subject to a restricted period under Rule 101 or 102 of Regulation M.18 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 member’s determination and the basis for such determination.19 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.20 FINRA notes that where the principal market closes early, for example for a holiday, the shortened session would constitute a complete 18 17 CFR 242.100, definition of ‘‘covered securities.’’ 19 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 represented that it 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 represented that it would require that the member demonstrate the basis for that determination. 20 In most instances, FINRA represented it 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). 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. E:\FR\FM\18SEN1.SGM 18SEN1 54192 Federal Register / Vol. 73, No. 182 / Thursday, September 18, 2008 / Notices dwashington3 on PRODPC61 with NOTICES trading session for purposes of proposed Rule 5190. 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 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).21 The proposed rule change also would eliminate the requirement in NASD Rule 2710(b)(10) that members submit a copy of the registration statement. FINRA represented that 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: (1) The security name and symbol; (2) the type of security; (3) the number of shares offered; (4) the offering price; (5) the last sale before the distribution; (6) the pricing basis (e.g., the prior day 21 FINRA represented that it 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. VerDate Aug<31>2005 15:26 Sep 17, 2008 Jkt 214001 closing price, a negotiated price, last sale, etc.); (7) the SEC effective date and time; (8) the trade date; and (9) 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, FINRA represented that current practice is for most members to provide immediate notice of pricing. FINRA believes that, in addition to being consistent 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. 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. FINRA believes that 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.22 In connection 22 The rule text for Proposed Rule 5190(d)(1) states that members must make a determination that ‘‘no restricted period applies under Rule 101.’’ The Commission notes, however, that although PO 00000 Frm 00059 Fmt 4703 Sfmt 4703 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) as 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.23 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).24 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 distribution participants may rely on the activelytraded securities exception of Rule 101(c)(1) if applicable, a restricted period would otherwise apply. For example, the actively-traded securities exception is not available in Rule 102. 23 FINRA represented 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). 24 Members would be required to update the notice required under proposed Rule 5190, as necessary (e.g., a manager would update the notice where distribution participants are added after commencement of the restricted period). E:\FR\FM\18SEN1.SGM 18SEN1 Federal Register / Vol. 73, No. 182 / Thursday, September 18, 2008 / Notices dwashington3 on PRODPC61 with NOTICES in the first syndicate covering transaction, as well as other pertinent information, such as identification of the security, 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). FINRA believes that 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 OTCBBeligible securities. In light of the foregoing, FINRA proposed to delete paragraphs (b)(10) and (11) from NASD Rule 2710 and Incorporated NYSE Rule 392 in its entirety. FINRA represented that 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 did not propose that these requirements become part of the Consolidated FINRA Rulebook. 3. Proposed Amendments to Marketplace Rules FINRA also proposed to clarify the scope and application of the Regulation M-related requirements that are in the current OTCBB and ADF marketplace rules. FINRA proposed 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. FINRA represented that 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 VerDate Aug<31>2005 15:26 Sep 17, 2008 Jkt 214001 from NASD Rule 6540) and comparable requirements would be housed in either proposed Rule 5190, as discussed above, or proposed Rule 6470. FINRA also proposed to make certain conforming changes to the Regulation M-related rules applicable to the ADF. Specifically, FINRA proposed to amend NASD Rule 4619A(f) to conform to the language and structure of proposed Rule 6470. Thus, a Registered Reporting ADF Market 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 further proposed 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. III. Discussion and Findings After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act, and the rules and regulations thereunder that are applicable to a national securities association.25 In particular, the Commission believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,26 which requires, among other things, that FINRA rules 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 Commission believes that moving the 25 In approving this proposal, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 26 15 U.S.C. 78o–3(b)(6). PO 00000 Frm 00060 Fmt 4703 Sfmt 4703 54193 Regulation M-related provisions of the rules under FINRA’s jurisdiction in the manner proposed will provide greater clarity to members and aid in compliance. The Commission also notes that it has previously approved the portions of NASD Rule 2710 to be adopted as FINRA Rule 5110,27 and the proposal merely moves that portion of Rule 2710 nearly verbatim from the NASD rulebook to the Consolidated FINRA Rulebook. The Commission believes that this move is primarily ministerial and only aids FINRA members in complying with existing obligations. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,28 that the proposed rule change (File No. SR– FINRA–2008–039) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.29 Florence E. Harmon, Acting Secretary. [FR Doc. E8–21760 Filed 9–17–08; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–58520; File No. SR–FINRA– 2008–040] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change To Eliminate the Requirement To Report Yield to TRACE and for FINRA To Calculate and Disseminate a Standard Yield September 11, 2008. I. Introduction On July 17, 2008, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposal to eliminate the requirement for members to report yield to the Trade Reporting and Compliance Engine (‘‘TRACE’’) in connection with a transaction in a TRACE-eligible security, and instead for TRACE to calculate and disseminate a ‘‘standard 27 See, e.g., Securities Exchange Act Release No. 48989 (December 23, 2003), 68 FR 75684 (December 31, 2003). 28 15 U.S.C. 78s(b)(2). 29 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. E:\FR\FM\18SEN1.SGM 18SEN1

Agencies

[Federal Register Volume 73, Number 182 (Thursday, September 18, 2008)]
[Notices]
[Pages 54190-54193]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-21760]



[[Page 54190]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58514; File No. SR-FINRA-2008-039]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving the 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

September 11, 2008.

I. Introduction

    On July 16, 2008, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and 
Rule 19b-4 thereunder,\2\ a proposal to adopt most of NASD Rule 2710 
(Corporate Financing Rule) as FINRA Rule 5110 in the consolidated FINRA 
rulebook, consolidating the rules in FINRA's jurisdiction relating to 
Regulation M as new Rules 5190 and 6470 in the consolidated FINRA 
rulebook, and make conforming changes to the rules related to 
Regulation M applicable to the Alternative Display Facility (``ADF''). 
This proposal was published for comment in the Federal Register on 
August 11, 2008.\3\ The Commission received no comments on the 
proposal. This order approves this proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 58302 (August 4, 2008), 
73 FR 46657 (August 11, 2008) (SR-FINRA-2008-039).
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II. Description of the Proposed Rule Change

    As part of the process of developing the new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\4\ 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 Over-the-
counter (``OTC'') Bulletin Board (``OTCBB'') rules and would apply to 
all OTC Equity Securities; \5\ and (4) make conforming amendments to 
the Regulation M-related rules applicable to the ADF.
---------------------------------------------------------------------------

    \4\ 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).
    \5\ 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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A. Corporate Financing Rule

    NASD Rule 2710, except paragraphs (b)(10) and (11) (which are 
discussed below), regulates the underwriting terms and arrangements of 
most public offerings (including shelf offerings) of securities sold 
through FINRA members. NASD Rule 2710 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 proposed 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 proposed to make 
only technical non-substantive changes to Rule 2710 such as replacing 
references to ``NASD'' or ``the Association'' with ``FINRA'' and 
certain conforming changes to references in Rule 2710 to, e.g., the 
Exchange Act, SEA Rules, the Securities Act and Securities Act Rules.

B. Regulation M-Related Requirements

    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.\6\ 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.\7\ 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) \8\ 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).\9\
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    \6\ See Securities Exchange Act Release No. 38067 (December 20, 
1996), 62 FR 520 (January 3, 1997).
    \7\ 17 CFR 242.100, definition of ``restricted period.''
    \8\ 17 CFR 242.100, definitions of ``stabilizing,'' ``syndicate 
covering transaction,'' and ``penalty bid.''
    \9\ See Securities 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' 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.
1. Existing FINRA Rules
    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

[[Page 54191]]

(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 Commission, 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 bids 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.\10\
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    \10\ See NASD Rule 6540(d)(1)(D)(iii).
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    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,\11\ and provide notice to 
FINRA's Operations Department prior to pricing.\12\ The member must 
also provide notice to the Market Regulation Department upon the 
pricing of the distribution.\13\ Additionally, members are prohibited 
from entering stabilizing bids pursuant to Rule 104 of Regulation M in 
the OTCBB.\14\
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    \11\ See NASD Rule 6540(d)(1)(D)(ii).
    \12\ See NASD Rule 6540(d)(1)(D)(i).
    \13\ See NASD Rule 6540(d)(1)(D)(iv).
    \14\ See NASD Rule 6540(d)(1)(D)(ii).
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    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.\15\ 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.\16\ 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.\17\
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    \15\ See NASD Rule 4619A(f).
    \16\ See NASD Rule 4619A(f)(1).
    \17\ See NASD Rule 4619A(f)(3).
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2. Proposed New FINRA Rule 5190
    FINRA proposed to consolidate and house all of its 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. FINRA believes that 
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'' subject to a restricted period under Rule 101 or 102 of 
Regulation M.\18\ 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 member's determination and the basis for such determination.\19\ 
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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    \18\ 17 CFR 242.100, definition of ``covered securities.''
    \19\ 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 represented that it 
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 represented that it would 
require that the member demonstrate the basis for that 
determination.
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    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.\20\ FINRA notes that where the principal 
market closes early, for example for a holiday, the shortened session 
would constitute a complete

[[Page 54192]]

trading session for purposes of proposed Rule 5190. 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.
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    \20\ In most instances, FINRA represented it 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). 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).\21\ The proposed rule change also would 
eliminate the requirement in NASD Rule 2710(b)(10) that members submit 
a copy of the registration statement. FINRA represented that 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.
---------------------------------------------------------------------------

    \21\ FINRA represented that it 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: (1) The security name and symbol; (2) the type of 
security; (3) the number of shares offered; (4) the offering price; (5) 
the last sale before the distribution; (6) the pricing basis (e.g., the 
prior day closing price, a negotiated price, last sale, etc.); (7) the 
SEC effective date and time; (8) the trade date; and (9) 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, FINRA represented that 
current practice is for most members to provide immediate notice of 
pricing. FINRA believes that, in addition to being consistent 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.
    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. FINRA believes that 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.\22\ 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.
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    \22\ The rule text for Proposed Rule 5190(d)(1) states that 
members must make a determination that ``no restricted period 
applies under Rule 101.'' The Commission notes, however, that 
although distribution participants may rely on the actively-traded 
securities exception of Rule 101(c)(1) if applicable, a restricted 
period would otherwise apply. For example, the actively-traded 
securities exception is not available in Rule 102.
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    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) as 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.\23\
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    \23\ FINRA represented 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).\24\
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    \24\ Members would be required to update the notice required 
under proposed Rule 5190, as necessary (e.g., a manager would update 
the notice where distribution participants are added after 
commencement of the restricted period).
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    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

[[Page 54193]]

in the first syndicate covering transaction, as well as other pertinent 
information, such as identification of the security, 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). FINRA believes that 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 proposed to delete paragraphs 
(b)(10) and (11) from NASD Rule 2710 and Incorporated NYSE Rule 392 in 
its entirety. FINRA represented that 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 did not propose 
that these requirements become part of the Consolidated FINRA Rulebook.
3. Proposed Amendments to Marketplace Rules
    FINRA also proposed to clarify the scope and application of the 
Regulation M-related requirements that are in the current OTCBB and ADF 
marketplace rules. FINRA proposed 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. FINRA represented that 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.
    FINRA also proposed to make certain conforming changes to the 
Regulation M-related rules applicable to the ADF. Specifically, FINRA 
proposed to amend NASD Rule 4619A(f) to conform to the language and 
structure of proposed Rule 6470. Thus, a Registered Reporting ADF 
Market 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 further proposed 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.

III. Discussion and Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act, and the rules 
and regulations thereunder that are applicable to a national securities 
association.\25\ In particular, the Commission believes that the 
proposed rule change is consistent with the provisions of Section 
15A(b)(6) of the Act,\26\ which requires, among other things, that 
FINRA rules 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 Commission 
believes that moving the Regulation M-related provisions of the rules 
under FINRA's jurisdiction in the manner proposed will provide greater 
clarity to members and aid in compliance. The Commission also notes 
that it has previously approved the portions of NASD Rule 2710 to be 
adopted as FINRA Rule 5110,\27\ and the proposal merely moves that 
portion of Rule 2710 nearly verbatim from the NASD rulebook to the 
Consolidated FINRA Rulebook. The Commission believes that this move is 
primarily ministerial and only aids FINRA members in complying with 
existing obligations.
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    \25\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \26\ 15 U.S.C. 78o-3(b)(6).
    \27\ See, e.g., Securities Exchange Act Release No. 48989 
(December 23, 2003), 68 FR 75684 (December 31, 2003).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change (File No. SR-FINRA-2008-039) be, 
and hereby is, approved.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-21760 Filed 9-17-08; 8:45 am]
BILLING CODE 8010-01-P