Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval to a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt FINRA Rules 2350 Through 2359 (Regarding Trading in Index Warrants, Currency Index Warrants, and Currency Warrants), FINRA Rule 2360 (Options), and FINRA Rule 2370 (Security Futures) in the Consolidated FINRA Rulebook, 69696-69699 [E8-27425]

Download as PDF 69696 Federal Register / Vol. 73, No. 224 / Wednesday, November 19, 2008 / Notices Number SR–BSE–2008–48 on the subject line. SECURITIES AND EXCHANGE COMMISSION Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. [Release No. 34–58932; File No. SR–FINRA– 2008–032] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of All submissions should refer to File Amendment No. 1 and Order Granting Number SR–BSE–2008–48. This file Accelerated Approval to a Proposed Rule Change, as Modified by number should be included on the subject line if e-mail is used. To help the Amendment No. 1, To Adopt FINRA Rules 2350 Through 2359 (Regarding Commission process and review your Trading in Index Warrants, Currency comments more efficiently, please use only one method. The Commission will Index Warrants, and Currency post all comments on the Commission’s Warrants), FINRA Rule 2360 (Options), and FINRA Rule 2370 (Security Internet Web site (http://www.sec.gov/ Futures) in the Consolidated FINRA rules/sro.shtml). Copies of the Rulebook 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 Section, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing will also be available for inspection and copying at the principal office of the self-regulatory organization. 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–BSE– 2008–48 and should be submitted on or before December 10, 2008. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.28 Florence E. Harmon, Acting Secretary. [FR Doc. E8–27422 Filed 11–18–08; 8:45 am] cprice-sewell on PROD1PC64 with NOTICES BILLING CODE 8011–01–P 28 17 CFR 200.30–3(a)(12). VerDate Aug<31>2005 15:14 Nov 18, 2008 Jkt 217001 November 12, 2008. I. Introduction On July 29, 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’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to adopt NASD Rules 2840 through 2853 regarding Trading in Index Warrants, Currency Index Warrants, and Currency Warrants, 2860 (Options), and 2865 (Security Futures) as FINRA Rules 2350 through 2359, 2360, and 2370, respectively, in the consolidated FINRA rulebook (‘‘Consolidated FINRA Rulebook’’), and to delete the corresponding provisions in Incorporated NYSE Rules 414 (Index and Currency Warrants), 424 (Report of Options), and the 700 Series (Option Rules). The proposed rule change was published for comment in the Federal Register on August 15, 2008.3 The Commission received one comment letter on the proposed rule change.4 FINRA filed Amendment No. 1 to the proposed rule change on October 8, 2008.5 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 58333 (August 8, 2008), 73 FR 47991 (‘‘Notice’’). 4 See letter to Florence E. Harmon, Acting Secretary, Commission, from Melissa MacGregor, Vice President and Assistant General Counsel, Securities Industry and Financial Markets Association (‘‘SIFMA’’) dated September 4, 2008 (‘‘SIFMA Letter’’). 5 In Amendment No. 1, FINRA responded to issues raised in the SIFMA Letter. In that regard, FINRA proposed to amend FINRA Rule 2360(b)(18) to allow a Limited Principal-General Securities Sales Supervisor to accept the discretionary options account. 2 17 PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 II. Description FINRA proposes to adopt, with minor changes described below: (1) NASD Rules 2840 through 2853 (regarding Trading in Index Warrants, Currency Index Warrants, and Currency Warrants) as FINRA Rules 2350 through 2359; (2) NASD Rule 2860 (Options) as FINRA Rule 2360; and (3) NASD Rule 2865 (Security Futures) as FINRA Rule 2370. Warrants, options, and security futures rules were adopted by FINRA to address the specific risks that pertain to these derivative securities, and to implement provisions of the federal securities laws and Commission rules.6 These rules include, among other things, provisions requiring specific disclosure documents, additional diligence in approving the opening of accounts, and specific requirements for confirmations, account statements, suitability, recordkeeping, and reporting. The rules also contain provisions imposing limits on the size of an options or warrant position and on the number of options contracts or warrants that can be exercised during a fixed period. Warrant Rules FINRA proposes to adopt NASD rules on index warrants, currency index warrants, and currency warrants, NASD Rules 2840 through 2853, as FINRA Rules 2350 through 2359, in substantially the form they exist today. The proposed rule change would reorganize certain requirements, grouping them along similar subject matter lines, by combining the statement of general applicability and definitions into a single rule (FINRA Rule 2351), and creating a single rule addressing position and exercise limits and liquidations (FINRA Rule 2359). Options Rule FINRA proposes to adopt NASD Rule 2860 as FINRA Rule 2360 with minor modifications to: (1) Delete obsolete definitions; (2) change all references to ‘‘Registered Options and Security Futures Principal’’ to ‘‘Registered Options Principal;’’ (3) permit a Limited Principal-General Securities Sales Supervisor to approve the opening of an options account; (4) modify the confirmation disclosure requirements consistent with recent changes to the equity confirmation disclosure requirements; (5) incorporate NASD Interpretative Materials 2860–1 and 6 For example, Rule 9b–1(d) under the Act requires a broker-dealer to furnish a customer with a copy of the options disclosure document before accepting an options order from a customer. 17 CFR 240.9b–1(d). E:\FR\FM\19NON1.SGM 19NON1 Federal Register / Vol. 73, No. 224 / Wednesday, November 19, 2008 / Notices 2860–2 into the rule text or as Supplementary Material; and (6) codify as Supplementary Material the provisions in NASD Notice to Members 07–03 (‘‘Notice 07–03’’) regarding control relationships.7 cprice-sewell on PROD1PC64 with NOTICES Security Futures Rule FINRA proposes to adopt NASD Rule 2865 as FINRA Rule 2370 with minor changes to preserve the general parallel treatment of options and security futures. In particular, FINRA proposes to update the provisions regarding discretionary accounts to conform to recent rule amendments made to the options rule.8 Under the proposed rule change, each firm must designate specific principals qualified to supervise security futures activities to review discretionary accounts.9 A principal other than the principal who accepted the account would review the acceptance of each discretionary account to determine that the principal accepting the account had a reasonable basis for believing that the customer was able to understand and bear the risks of the strategies or transactions proposed and must maintain a record of the basis for such determination. To mirror recent changes to the options rule, the proposed rule change would eliminate the requirement that discretionary orders be approved on the day of entry by a principal qualified to supervise security futures activities if a firm uses computerized surveillance tools. Discretionary orders for firms using computerized surveillance tools instead may be reviewed in accordance with the member firm’s written supervisory procedures. Firms that do not use computerized surveillance tools must, as they do today, establish and implement procedures requiring principals qualified to supervise security futures activities who have been designated to review discretionary accounts to approve and initial each discretionary order on the day entered.10 Finally, FINRA proposes to limit the duration of the time and price discretionary authority to the end of the business day on which the customer granted such discretion, absent specific 7 See Notice, supra note 3, for a discussion of these proposed revisions. 8 See Securities Exchange Act Release No. 57775 (May 5, 2008), 73 FR 26453 (May 9, 2008) (SR– FINRA–2007–035) (‘‘Release No. 34–57775’’). 9 As provided in NASD Rule 1022(f)(5), any Registered Options Principal that supervises security futures products must complete a firmelement continuing education program that addresses security futures and a principal’s responsibilities for supervising such products. 10 See Release No. 34–57775, supra note 8, relating to recent changes to FINRA’s options rule. VerDate Aug<31>2005 15:14 Nov 18, 2008 Jkt 217001 written contrary indication signed and dated by the customer. This limitation would not apply to discretion exercised in an institutional account, as defined in NASD Rule 3110(c)(4), pursuant to Good-Till-Canceled instructions issued on a ‘‘not held’’ basis. The proposed rule change would require that any exercise of time and price discretion be reflected on the order ticket. These changes mirror the limitations to discretionary authority provided in NASD Rule 2510(d) and the options rule. Deleted Rules FINRA proposes to delete the following Incorporated NYSE Rules as the substance of such rules is addressed in the proposed FINRA rules: 11 Incorporated NYSE Rules 414 (Index and Currency Warrants); 424 (Reports of Options); 700 (Applicability, Definitions and References); 704 (Position Limits); 705 (Exercise Limits); 707 (Liquidation of Positions); 709 (Other Restrictions on Exchange Option Transactions and Exercises); 720 (Registration of Options Principals); 721 (Opening of Accounts); 722 (Supervision of Accounts); 723 (Suitability); 724 (Discretionary Accounts); 725 (Confirmations); 726 (Delivery of Options Disclosure Document and Prospectus); 727 (Transactions with Issuers); 728 (Restricted Stock); 730 (Statement of Accounts); 732 (Customer Complaints); 780 (Exercise of Option Contracts); 781 (Allocation of Exercise Assignment Notices); and 791 (Communications to Customers). 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 Commission’s Findings After careful review of the proposed rule change, and the comment letter and FINRA’s response, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association.12 In particular, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Act,13 which requires, 11 FINRA advises that, in several instances, the Incorporated NYSE Rules are no longer applicable by their own terms as the NYSE no longer trades options. 12 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). 13 15 U.S.C. 78o–3(b)(6). PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 69697 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 Commission notes that the warrant rules (NASD Rules 2840 through 2853) and the security futures rule (NASD Rule 2865) are being incorporated into the Consolidated FINRA Rulebook in substantially the same form that exists today, with only minor changes to improve the organization of the rules and to ensure parallel treatment of options and security futures. NASD Rule 2860 also will be incorporated into the Consolidated FINRA Rulebook in substantially the same form that exists today, except for modifications to: (1) Delete obsolete definitions; (2) change all references to ‘‘Registered Options and Security Futures Principal’’ to ‘‘Registered Options Principal;’’ (3) permit a Limited Principal-General Securities Sales Supervisor to approve the opening of an options account; (4) allow a Limited Principal-General Securities Sales Supervisor (Series 9/10) in addition to a Registered Options Principal (Series 4) to accept the discretionary options account; (5) modify the confirmation disclosure requirements consistent with recent changes to the equity confirmation disclosure requirements; 14 (6) incorporate NASD Interpretative Materials 2860–1 and 2860–2 into the rule text or as Supplementary Material; and (7) codify as Supplementary Material the provisions in NASD Notice to Members 07–03 (‘‘Notice 07–03’’) regarding control relationships. Lastly, Incorporated NYSE Rules 414, 424, 700, 705, 707, 709, 720–728, 730, 732, 780– 781, 791 are being deleted because the substance of these rules is addressed in the proposed FINRA Rules. SIFMA submitted a comment letter that generally supported the proposal, but requested one change and one clarification in the area of options discretionary accounts. The proposed rule, as is the case today in NASD Rule 2860(b)(18), requires that a Registered Options Principal, other than the Registered Options Principal who accepted the account, review the acceptance of each discretionary account to determine that the Registered Options Principal accepting the account had a reasonable basis for believing that the customer was able to understand and bear the risk of the strategies or 14 See Securities Exchange Act Release No. 58814 (October 20, 2008), 73 FR 63527 (October 24, 2008) (SR–Amex–2008–53). E:\FR\FM\19NON1.SGM 19NON1 69698 Federal Register / Vol. 73, No. 224 / Wednesday, November 19, 2008 / Notices transactions proposed.15 SIFMA believes that discretionary options accounts ‘‘are subject to sufficient supervisory scrutiny and the additional requirement of a second approval is unnecessary to protect investors’’ in light of the frequent supervisory review of the activity in the account by a Registered Options Principal who is not exercising the discretionary authority.16 In the event that FINRA believes that a second approval is necessary, SIFMA ‘‘strongly urges’’ that FINRA permit the acceptance of the discretionary account, as well as the review of the acceptance of the discretionary account, to be performed by either a Registered Options Principal (Series 4) or a Limited Principal-General Securities Sales Supervisor (Series 9/10).17 Lastly, SIFMA requested clarification in FINRA Rule 2360(b)(18) that the frequent supervisory review by a Registered Options Principal who is not exercising the discretionary authority may be performed by a Limited PrincipalGeneral Securities Sales Supervisor (Series 9/10) in addition to a Registered Options Principal (Series 4).18 In response to the SIFMA Letter, FINRA filed Amendment No. 1 to the proposed rule change.19 In Amendment No. 1, FINRA noted that SIFMA commented on provisions that were the subject of recent amendments as part of FINRA’s overall revisions to options supervision. According to FINRA, the proposed rule change simply moves into the FINRA consolidated rulebook the current NASD provisions, which are generally consistent across the options exchanges.20 FINRA disagreed with SIFMA’s assertion that review of the acceptance of a discretionary options account is ‘‘unnecessary to protect investors.’’ FINRA stated that it continues to believe that heightened supervision in the form of requiring a review of the acceptance of a discretionary options account is both appropriate and necessary.21 FINRA noted however, that consistent with the 15 See 16 See proposed FINRA Rule 2360(b)(18)(A)(ii). SIFMA Letter at 2, supra note 4. 17 Id. 18 Id. 19 See Amendment No. 1, supra note 5. examples of discretionary options accounts rules on other exchanges, FINRA pointed to Chicago Board Options Exchange (‘‘CBOE’’) Rule 9.10, American Stock Exchange Rule 924, NASDAQ OMX PHLX Rule 1027, and Boston Options Exchange Chapter XI Section 12. FINRA also noted that the International Securities Exchange has filed a proposed rule change (SR–ISE–2008–21) with the Commission to make conforming changes to its Rule 611 (Discretionary Accounts). 21 See Amendment No. 1, supra note 5, at 4. cprice-sewell on PROD1PC64 with NOTICES 20 As VerDate Aug<31>2005 15:14 Nov 18, 2008 Jkt 217001 rules of the CBOE,22 it proposes to amend FINRA Rule 2360(b)(18) to permit greater flexibility and allow a Limited Principal-General Securities Sales Supervisor (Series 9/10) in addition to a Registered Options Principal (Series 4) to accept the discretionary options account.23 FINRA believed, consistent with the CBOE provision, that the review of the acceptance of a discretionary options account must be performed by a Registered Options Principal (Series 4). Similarly, FINRA believed that the ‘‘frequent appropriate supervisory review by a Registered Options Principal who is not exercising the discretionary authority’’ should be performed by a Registered Options Principal (Series 4).24 The Commission believes that the proposed rule change to incorporate rules relating to warrants, options, and security futures into the Consolidated FINRA Rulebook and to delete corresponding NYSE Incorporated Rules is appropriate. In addition the Commission believes that the revision to the proposed rule text and the clarification contained in Amendment No. 1 appropriately address the issues raised in the SIFMA Letter. The Commission finds good cause, pursuant to Section 19(b)(2) of the Act,25 for approving the proposed rule change, as modified, prior to the thirtieth day after the date of publication of notice in the Federal Register. FINRA’s proposed changes, with the exception of the proposed revisions contained in Amendment No. 1, were published for comment by the Commission. The Commission believes that the proposed changes to FINRA Rule 2360 that are part of Amendment No. 1 are consistent with Interpretations and Policies .02 to CBOE Rule 9.2, which was published for comment and approved by the Commission.26 Accordingly, the Commission finds that there is good cause, consistent with Section 6(b)(5) of the Act,27 to approve the proposed rule change, as modified 22 Interpretations and Policies .02 to CBOE Rule 9.2 specifies that the review of the acceptance of a discretionary account must be performed by a Series 4 qualified individual. See Securities Exchange Act Release No. 56971 (December 14, 2007), 72 FR 72804 (December 21, 2007) (SR– CBOE–2007–106). 23 See Amendment No. 1, supra note 5, at 4. 24 Id. 25 15 U.S.C. 78s(b)(2). 26 See Securities Exchange Act Release Nos. 56492 (September 21, 2007), 72 FR 54952 (September 27, 2007) (SR–CBOE–2007–106); and 56971 (December 14, 2007), 72 FR 72804 (December 21, 2007) (SR–CBOE–2007–106). 27 15 U.S.C. 78s(b)(5). PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 by Amendment No. 1, on an accelerated basis. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as modified by Amendment No. 1, 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 SR–FINRA–2008–032 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–FINRA–2008–032. 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 the 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– 2008–032 and should be submitted on or before December 10, 2008. E:\FR\FM\19NON1.SGM 19NON1 Federal Register / Vol. 73, No. 224 / Wednesday, November 19, 2008 / Notices V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,28 that the proposed rule change (SR–FINRA– 2008–032), as modified by Amendment No. 1, 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. E8–27425 Filed 11–18–08; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–58937; File No. SR–FINRA– 2008–056] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Information Sharing Agreements With Domestic Federal Agencies, or Subdivisions Thereof, and Foreign Regulators November 13, 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 November 6, 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 and II below, which Items have been prepared by FINRA. FINRA has designated the proposed rule change as constituting a ‘‘non-controversial’’ rule change under paragraph (f)(6) of Rule 19b–4 under the Act,3 which renders the proposal effective upon receipt of this filing by the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. cprice-sewell on PROD1PC64 with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to amend FINRA Rule 8210 to expressly permit FINRA to enter into information-sharing agreements with domestic federal 28 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 17 CFR 240.19b–4(f)(6). 29 17 VerDate Aug<31>2005 15:14 Nov 18, 2008 Jkt 217001 agencies, or subdivisions thereof, and foreign regulators.4 The text of the proposed rule change is available at FINRA’s Web site at www.finra.org, at the principal office of FINRA and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose FINRA Rule 8210 confers on FINRA staff the authority to compel a member and persons associated with a member to provide documents and testimony, or allow inspection and copying of a member’s books and records, in connection with an investigation, complaint, examination or adjudicatory proceeding. The rule additionally permits FINRA staff to exercise such authority in furtherance of an investigation, complaint, examination or proceeding conducted by another domestic or foreign regulator with which FINRA has entered into an agreement providing for the exchange of 4 On September 25, 2008, the SEC approved proposed rule change SR–FINRA–2008–021, in which FINRA proposed, among other things, to adopt the NASD 8000 Series as the FINRA Rule 8000 Series (Investigations and Sanctions) in the Consolidated FINRA Rulebook. See Securities Exchange Act Release No. 58643 (September 25, 2008), 73 FR 57174 (October 1, 2008) (Order Approving SR–FINRA–2008–021; SR–FINRA– 2008–022; SR–FINRA–2008–026; SR–FINRA–2008– 028 and SR–FINRA–2008–029). As part of that proposed rule change, FINRA adopted the provisions of NASD Rule 8210 as new FINRA Rule 8210 with certain non-material changes. FINRA has set December 15, 2008 as the implementation date of SR–FINRA–2008–021, see FINRA Regulatory Notice 08–57 (October 16, 2008) (FINRA Announces SEC Approval and Effective Date for New Consolidated FINRA Rules). Because FINRA Rule 8210 has not yet been implemented and the corresponding NASD Rule 8210 remains operative until December 15, 2008, the proposed rule change would amend both NASD Rule 8210 and FINRA Rule 8210. On December 15, 2008, NASD Rule 8210, as amended pursuant to this proposed rule change, will be deleted in accordance with SR–FINRA–2008–021, without a further filing. PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 69699 information and other forms of material assistance for regulatory purposes. FINRA’s Restated Certificate of Incorporation allows it to do all acts permissible under Delaware state law.5 Delaware Corporation Law allows FINRA to contract generally.6 FINRA considers the exchanging of information with certain other regulators, pursuant to agreements, to be an important part of its regulatory program. The proposed rule change would make explicit the authority to enter into agreements with domestic federal agencies, or subdivisions thereof, and foreign regulators and to share information with them, irrespective of whether the information was obtained in furtherance of an existing investigation or other regulatory action by another regulator. Instead, the proposal would expressly allow FINRA to share any information in its possession for any regulatory purpose set forth in the agreement. The proposal would require that any such agreements entered into by FINRA include a provision obligating the other regulator, in accordance with the terms of the agreement, to treat any shared information confidentially and to assert such confidentiality and other applicable privileges in response to any requests for such information from third parties. In addition, the proposal would impose two further conditions on agreements with a foreign regulator. First, an agreement could only be consummated with a foreign regulator that has jurisdiction over common regulatory matters; i.e., those involving investor protection or market integrity. Second, the agreement would require reciprocity from the other regulator to share information of regulatory interest and concern to FINRA. FINRA believes it important to expressly evidence in the rule and related filing its intent that the disclosure of non-public information pursuant to a memorandum of understanding not be viewed in any manner as a waiver of FINRA’s right to protect the information, as appropriate, from further disclosure. The proposed rule change would not impose the additional conditions on information sharing agreements with domestic federal agencies or subdivisions thereof.7 5 See Article III of the Restated Certificate of Incorporation of National Association of Securities Dealers, Inc., available at http:// finra.complinet.com. 6 See generally, Del. Code Ann. tit. 8, §§ 122, 122(13) (2008). 7 FINRA notes that it is obligated under the Act to provide the Commission records upon request. 15 U.S.C. 78q(a)(1). E:\FR\FM\19NON1.SGM 19NON1

Agencies

[Federal Register Volume 73, Number 224 (Wednesday, November 19, 2008)]
[Notices]
[Pages 69696-69699]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-27425]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58932; File No. SR-FINRA-2008-032]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval to a Proposed Rule Change, as Modified by 
Amendment No. 1, To Adopt FINRA Rules 2350 Through 2359 (Regarding 
Trading in Index Warrants, Currency Index Warrants, and Currency 
Warrants), FINRA Rule 2360 (Options), and FINRA Rule 2370 (Security 
Futures) in the Consolidated FINRA Rulebook

November 12, 2008.

I. Introduction

    On July 29, 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''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt NASD Rules 2840 through 2853 regarding 
Trading in Index Warrants, Currency Index Warrants, and Currency 
Warrants, 2860 (Options), and 2865 (Security Futures) as FINRA Rules 
2350 through 2359, 2360, and 2370, respectively, in the consolidated 
FINRA rulebook (``Consolidated FINRA Rulebook''), and to delete the 
corresponding provisions in Incorporated NYSE Rules 414 (Index and 
Currency Warrants), 424 (Report of Options), and the 700 Series (Option 
Rules). The proposed rule change was published for comment in the 
Federal Register on August 15, 2008.\3\ The Commission received one 
comment letter on the proposed rule change.\4\ FINRA filed Amendment 
No. 1 to the proposed rule change on October 8, 2008.\5\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 58333 (August 8, 
2008), 73 FR 47991 (``Notice'').
    \4\ See letter to Florence E. Harmon, Acting Secretary, 
Commission, from Melissa MacGregor, Vice President and Assistant 
General Counsel, Securities Industry and Financial Markets 
Association (``SIFMA'') dated September 4, 2008 (``SIFMA Letter'').
    \5\ In Amendment No. 1, FINRA responded to issues raised in the 
SIFMA Letter. In that regard, FINRA proposed to amend FINRA Rule 
2360(b)(18) to allow a Limited Principal-General Securities Sales 
Supervisor to accept the discretionary options account.
---------------------------------------------------------------------------

II. Description

    FINRA proposes to adopt, with minor changes described below: (1) 
NASD Rules 2840 through 2853 (regarding Trading in Index Warrants, 
Currency Index Warrants, and Currency Warrants) as FINRA Rules 2350 
through 2359; (2) NASD Rule 2860 (Options) as FINRA Rule 2360; and (3) 
NASD Rule 2865 (Security Futures) as FINRA Rule 2370.
    Warrants, options, and security futures rules were adopted by FINRA 
to address the specific risks that pertain to these derivative 
securities, and to implement provisions of the federal securities laws 
and Commission rules.\6\ These rules include, among other things, 
provisions requiring specific disclosure documents, additional 
diligence in approving the opening of accounts, and specific 
requirements for confirmations, account statements, suitability, 
recordkeeping, and reporting. The rules also contain provisions 
imposing limits on the size of an options or warrant position and on 
the number of options contracts or warrants that can be exercised 
during a fixed period.
---------------------------------------------------------------------------

    \6\ For example, Rule 9b-1(d) under the Act requires a broker-
dealer to furnish a customer with a copy of the options disclosure 
document before accepting an options order from a customer. 17 CFR 
240.9b-1(d).
---------------------------------------------------------------------------

Warrant Rules

    FINRA proposes to adopt NASD rules on index warrants, currency 
index warrants, and currency warrants, NASD Rules 2840 through 2853, as 
FINRA Rules 2350 through 2359, in substantially the form they exist 
today. The proposed rule change would reorganize certain requirements, 
grouping them along similar subject matter lines, by combining the 
statement of general applicability and definitions into a single rule 
(FINRA Rule 2351), and creating a single rule addressing position and 
exercise limits and liquidations (FINRA Rule 2359).

Options Rule

    FINRA proposes to adopt NASD Rule 2860 as FINRA Rule 2360 with 
minor modifications to: (1) Delete obsolete definitions; (2) change all 
references to ``Registered Options and Security Futures Principal'' to 
``Registered Options Principal;'' (3) permit a Limited Principal-
General Securities Sales Supervisor to approve the opening of an 
options account; (4) modify the confirmation disclosure requirements 
consistent with recent changes to the equity confirmation disclosure 
requirements; (5) incorporate NASD Interpretative Materials 2860-1 and

[[Page 69697]]

2860-2 into the rule text or as Supplementary Material; and (6) codify 
as Supplementary Material the provisions in NASD Notice to Members 07-
03 (``Notice 07-03'') regarding control relationships.\7\
---------------------------------------------------------------------------

    \7\ See Notice, supra note 3, for a discussion of these proposed 
revisions.
---------------------------------------------------------------------------

Security Futures Rule

    FINRA proposes to adopt NASD Rule 2865 as FINRA Rule 2370 with 
minor changes to preserve the general parallel treatment of options and 
security futures. In particular, FINRA proposes to update the 
provisions regarding discretionary accounts to conform to recent rule 
amendments made to the options rule.\8\ Under the proposed rule change, 
each firm must designate specific principals qualified to supervise 
security futures activities to review discretionary accounts.\9\ A 
principal other than the principal who accepted the account would 
review the acceptance of each discretionary account to determine that 
the principal accepting the account had a reasonable basis for 
believing that the customer was able to understand and bear the risks 
of the strategies or transactions proposed and must maintain a record 
of the basis for such determination.
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    \8\ See Securities Exchange Act Release No. 57775 (May 5, 2008), 
73 FR 26453 (May 9, 2008) (SR-FINRA-2007-035) (``Release No. 34-
57775'').
    \9\ As provided in NASD Rule 1022(f)(5), any Registered Options 
Principal that supervises security futures products must complete a 
firm-element continuing education program that addresses security 
futures and a principal's responsibilities for supervising such 
products.
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    To mirror recent changes to the options rule, the proposed rule 
change would eliminate the requirement that discretionary orders be 
approved on the day of entry by a principal qualified to supervise 
security futures activities if a firm uses computerized surveillance 
tools. Discretionary orders for firms using computerized surveillance 
tools instead may be reviewed in accordance with the member firm's 
written supervisory procedures. Firms that do not use computerized 
surveillance tools must, as they do today, establish and implement 
procedures requiring principals qualified to supervise security futures 
activities who have been designated to review discretionary accounts to 
approve and initial each discretionary order on the day entered.\10\
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    \10\ See Release No. 34-57775, supra note 8, relating to recent 
changes to FINRA's options rule.
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    Finally, FINRA proposes to limit the duration of the time and price 
discretionary authority to the end of the business day on which the 
customer granted such discretion, absent specific written contrary 
indication signed and dated by the customer. This limitation would not 
apply to discretion exercised in an institutional account, as defined 
in NASD Rule 3110(c)(4), pursuant to Good-Till-Canceled instructions 
issued on a ``not held'' basis. The proposed rule change would require 
that any exercise of time and price discretion be reflected on the 
order ticket. These changes mirror the limitations to discretionary 
authority provided in NASD Rule 2510(d) and the options rule.

Deleted Rules

    FINRA proposes to delete the following Incorporated NYSE Rules as 
the substance of such rules is addressed in the proposed FINRA rules: 
\11\ Incorporated NYSE Rules 414 (Index and Currency Warrants); 424 
(Reports of Options); 700 (Applicability, Definitions and References); 
704 (Position Limits); 705 (Exercise Limits); 707 (Liquidation of 
Positions); 709 (Other Restrictions on Exchange Option Transactions and 
Exercises); 720 (Registration of Options Principals); 721 (Opening of 
Accounts); 722 (Supervision of Accounts); 723 (Suitability); 724 
(Discretionary Accounts); 725 (Confirmations); 726 (Delivery of Options 
Disclosure Document and Prospectus); 727 (Transactions with Issuers); 
728 (Restricted Stock); 730 (Statement of Accounts); 732 (Customer 
Complaints); 780 (Exercise of Option Contracts); 781 (Allocation of 
Exercise Assignment Notices); and 791 (Communications to Customers).
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    \11\ FINRA advises that, in several instances, the Incorporated 
NYSE Rules are no longer applicable by their own terms as the NYSE 
no longer trades options.
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    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 Commission's Findings

    After careful review of the proposed rule change, and the comment 
letter and FINRA's response, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
association.\12\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\13\ 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.
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    \12\ 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).
    \13\ 15 U.S.C. 78o-3(b)(6).
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    The Commission notes that the warrant rules (NASD Rules 2840 
through 2853) and the security futures rule (NASD Rule 2865) are being 
incorporated into the Consolidated FINRA Rulebook in substantially the 
same form that exists today, with only minor changes to improve the 
organization of the rules and to ensure parallel treatment of options 
and security futures. NASD Rule 2860 also will be incorporated into the 
Consolidated FINRA Rulebook in substantially the same form that exists 
today, except for modifications to: (1) Delete obsolete definitions; 
(2) change all references to ``Registered Options and Security Futures 
Principal'' to ``Registered Options Principal;'' (3) permit a Limited 
Principal-General Securities Sales Supervisor to approve the opening of 
an options account; (4) allow a Limited Principal-General Securities 
Sales Supervisor (Series 9/10) in addition to a Registered Options 
Principal (Series 4) to accept the discretionary options account; (5) 
modify the confirmation disclosure requirements consistent with recent 
changes to the equity confirmation disclosure requirements; \14\ (6) 
incorporate NASD Interpretative Materials 2860-1 and 2860-2 into the 
rule text or as Supplementary Material; and (7) codify as Supplementary 
Material the provisions in NASD Notice to Members 07-03 (``Notice 07-
03'') regarding control relationships. Lastly, Incorporated NYSE Rules 
414, 424, 700, 705, 707, 709, 720-728, 730, 732, 780-781, 791 are being 
deleted because the substance of these rules is addressed in the 
proposed FINRA Rules.
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    \14\ See Securities Exchange Act Release No. 58814 (October 20, 
2008), 73 FR 63527 (October 24, 2008) (SR-Amex-2008-53).
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    SIFMA submitted a comment letter that generally supported the 
proposal, but requested one change and one clarification in the area of 
options discretionary accounts. The proposed rule, as is the case today 
in NASD Rule 2860(b)(18), requires that a Registered Options Principal, 
other than the Registered Options Principal who accepted the account, 
review the acceptance of each discretionary account to determine that 
the Registered Options Principal accepting the account had a reasonable 
basis for believing that the customer was able to understand and bear 
the risk of the strategies or

[[Page 69698]]

transactions proposed.\15\ SIFMA believes that discretionary options 
accounts ``are subject to sufficient supervisory scrutiny and the 
additional requirement of a second approval is unnecessary to protect 
investors'' in light of the frequent supervisory review of the activity 
in the account by a Registered Options Principal who is not exercising 
the discretionary authority.\16\ In the event that FINRA believes that 
a second approval is necessary, SIFMA ``strongly urges'' that FINRA 
permit the acceptance of the discretionary account, as well as the 
review of the acceptance of the discretionary account, to be performed 
by either a Registered Options Principal (Series 4) or a Limited 
Principal-General Securities Sales Supervisor (Series 9/10).\17\ 
Lastly, SIFMA requested clarification in FINRA Rule 2360(b)(18) that 
the frequent supervisory review by a Registered Options Principal who 
is not exercising the discretionary authority may be performed by a 
Limited Principal-General Securities Sales Supervisor (Series 9/10) in 
addition to a Registered Options Principal (Series 4).\18\
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    \15\ See proposed FINRA Rule 2360(b)(18)(A)(ii).
    \16\ See SIFMA Letter at 2, supra note 4.
    \17\ Id.
    \18\ Id.
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    In response to the SIFMA Letter, FINRA filed Amendment No. 1 to the 
proposed rule change.\19\ In Amendment No. 1, FINRA noted that SIFMA 
commented on provisions that were the subject of recent amendments as 
part of FINRA's overall revisions to options supervision. According to 
FINRA, the proposed rule change simply moves into the FINRA 
consolidated rulebook the current NASD provisions, which are generally 
consistent across the options exchanges.\20\ FINRA disagreed with 
SIFMA's assertion that review of the acceptance of a discretionary 
options account is ``unnecessary to protect investors.'' FINRA stated 
that it continues to believe that heightened supervision in the form of 
requiring a review of the acceptance of a discretionary options account 
is both appropriate and necessary.\21\ FINRA noted however, that 
consistent with the rules of the CBOE,\22\ it proposes to amend FINRA 
Rule 2360(b)(18) to permit greater flexibility and allow a Limited 
Principal-General Securities Sales Supervisor (Series 9/10) in addition 
to a Registered Options Principal (Series 4) to accept the 
discretionary options account.\23\ FINRA believed, consistent with the 
CBOE provision, that the review of the acceptance of a discretionary 
options account must be performed by a Registered Options Principal 
(Series 4). Similarly, FINRA believed that the ``frequent appropriate 
supervisory review by a Registered Options Principal who is not 
exercising the discretionary authority'' should be performed by a 
Registered Options Principal (Series 4).\24\
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    \19\ See Amendment No. 1, supra note 5.
    \20\ As examples of discretionary options accounts rules on 
other exchanges, FINRA pointed to Chicago Board Options Exchange 
(``CBOE'') Rule 9.10, American Stock Exchange Rule 924, NASDAQ OMX 
PHLX Rule 1027, and Boston Options Exchange Chapter XI Section 12. 
FINRA also noted that the International Securities Exchange has 
filed a proposed rule change (SR-ISE-2008-21) with the Commission to 
make conforming changes to its Rule 611 (Discretionary Accounts).
    \21\ See Amendment No. 1, supra note 5, at 4.
    \22\ Interpretations and Policies .02 to CBOE Rule 9.2 specifies 
that the review of the acceptance of a discretionary account must be 
performed by a Series 4 qualified individual. See Securities 
Exchange Act Release No. 56971 (December 14, 2007), 72 FR 72804 
(December 21, 2007) (SR-CBOE-2007-106).
    \23\ See Amendment No. 1, supra note 5, at 4.
    \24\ Id.
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    The Commission believes that the proposed rule change to 
incorporate rules relating to warrants, options, and security futures 
into the Consolidated FINRA Rulebook and to delete corresponding NYSE 
Incorporated Rules is appropriate. In addition the Commission believes 
that the revision to the proposed rule text and the clarification 
contained in Amendment No. 1 appropriately address the issues raised in 
the SIFMA Letter.
    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\25\ for approving the proposed rule change, as modified, prior 
to the thirtieth day after the date of publication of notice in the 
Federal Register. FINRA's proposed changes, with the exception of the 
proposed revisions contained in Amendment No. 1, were published for 
comment by the Commission. The Commission believes that the proposed 
changes to FINRA Rule 2360 that are part of Amendment No. 1 are 
consistent with Interpretations and Policies .02 to CBOE Rule 9.2, 
which was published for comment and approved by the Commission.\26\ 
Accordingly, the Commission finds that there is good cause, consistent 
with Section 6(b)(5) of the Act,\27\ to approve the proposed rule 
change, as modified by Amendment No. 1, on an accelerated basis.
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    \25\ 15 U.S.C. 78s(b)(2).
    \26\ See Securities Exchange Act Release Nos. 56492 (September 
21, 2007), 72 FR 54952 (September 27, 2007) (SR-CBOE-2007-106); and 
56971 (December 14, 2007), 72 FR 72804 (December 21, 2007) (SR-CBOE-
2007-106).
    \27\ 15 U.S.C. 78s(b)(5).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 1, 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 SR-FINRA-2008-032 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-FINRA-2008-032. 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 the 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-2008-032 and should be 
submitted on or before December 10, 2008.

[[Page 69699]]

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change (SR-FINRA-2008-032), as modified 
by Amendment No. 1, 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. E8-27425 Filed 11-18-08; 8:45 am]
BILLING CODE 8011-01-P