Self-Regulatory Organizations: Financial Industry Regulatory Authority, Inc.; Order Granting Approval of Proposed Rule Change Relating to the Supervision of Market Letters, 77085-77086 [E8-30066]

Download as PDF Federal Register / Vol. 73, No. 244 / Thursday, December 18, 2008 / Notices Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–CBOE–2008–124. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the CBOE. 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–CBOE–2008–124 and should be submitted on or before January 8, 2009. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Florence E. Harmon, Acting Secretary. [FR Doc. E8–30068 Filed 12–17–08; 8:45 am] mstockstill on PROD1PC66 with NOTICES BILLING CODE 8011–01–P 9 17 17:51 Dec 17, 2008 [Release No. 34–59096; File No. SR–FINRA– 2008–044] Self-Regulatory Organizations: Financial Industry Regulatory Authority, Inc.; Order Granting Approval of Proposed Rule Change Relating to the Supervision of Market Letters December 12, 2008. I. Introduction On September 4, 2008, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) (f/k/a National Association of Securities Dealers, Inc. (‘‘NASD’’)) filed with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’), 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 relating to the supervision of market letters. The proposed rule change was published for comment in the Federal Register on October 1, 2008.3 The Commission received four comment letters on the proposal.4 This order approves the proposed rule change. II. Description of the Proposal FINRA proposed to amend NASD Rules 2210 (Communications with the Public) and 2211 (Institutional Sales Material and Correspondence) and Incorporated New York Stock Exchange (‘‘NYSE’’) Rule 472 (Communications with the Public) to address the supervision of market letters.5 Among other things, the proposed rule change would amend the definition of ‘‘sales literature’’ in NASD Rule 2210 to exclude market letters that qualify as ‘‘correspondence’’ and would define ‘‘correspondence’’ in NASD Rule 2211 to include market letters distributed by a member to one or more of its existing retail customers and fewer than 25 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 58648 (September 25, 2008); 73 FR 57177, 57179 (October 1, 2008). 4 William A. Jacobson, The Cornell Securities Law Clinic (October 20, 2008) (the ‘‘Cornell Letter’’); Neal E Nakagiri, NPB Financial Group LLC (October 20, 2008); Dale E. Brown, Financial Services Institute (October 22, 2008); Michael Mungenast, president, ProEquities (Nov. 7, 2008). 5 The FINRA rulebook currently includes (1) NASD Rules and (2) rules incorporated from NYSE (‘‘Incorporated NYSE Rules’’). While the NASD Rules generally apply to all FINRA members, the Incorporated NYSE Rules apply only to members of both FINRA and the NYSE, referred to as Dual Members. 2 17 CFR 200.30–3(a)(12). VerDate Aug<31>2005 SECURITIES AND EXCHANGE COMMISSION Jkt 217001 PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 77085 prospective retail customers within any 30 calendar-day period. NASD Rule 2210 (Communications with the Public) requires a registered principal of a member to approve prior to use any item of sales literature. The term ‘‘sales literature’’ does not include any item distributed or made available only to institutional investors.6 ‘‘Sales literature’’ includes ‘‘market letters.’’ Incorporated NYSE Rule 472 similarly requires a qualified person to approve in advance of distribution any market letter, but contains no exception for market letters sent only to institutional investors. FINRA is concerned that the pre-approval requirements may, in some circumstances, inhibit the flow of information to traders and other investors who base their investment decisions on timely market analysis. To address this concern, FINRA proposed to amend the definition of ‘‘sales literature’’ in NASD Rule 2210 to exclude market letters that qualify as a ‘‘correspondence’’ and further to amend ‘‘correspondence’’ in NASD Rule 2211 to include market letters (as well as any written letter or electronic mail message) distributed by a member to one or more of its existing retail customers and fewer than 25 prospective retail customers within any 30 calendar-day period. Pursuant to NASD Rule 2211(b)(1)(A), correspondence does not require approval by a registered principal prior to use, unless such correspondence is distributed to 25 or more existing retail customers within any 30 calendar-day period and makes a financial or investment recommendation or otherwise promotes a product or service of the member. The proposed rule change also would amend Incorporated NYSE Rule 472 to eliminate the requirement that a qualified person approve market letters in advance of distribution. Thus, under the proposed rule change, all FINRA members would be permitted under FINRA rules to distribute market letters to institutional investors (as defined in NASD Rule 2211(a)(3)) without requiring prior approval by a registered principal or qualified person. In addition, under the proposed rules, a member also could distribute without prior approval by a registered principal a market letter that 6 Pursuant to NASD Rule 2211(a)(2), communications of any kind sent only to institutional investors (as defined in NASD Rule 2211(a)(3)) are considered to be ‘‘institutional sales material.’’ NASD Rule 2210 does not require approval of institutional sales material by a registered principal prior to use. However, institutional sales material remains subject to the supervision and review requirements of NASD Rule 2211(b)(1)(B). E:\FR\FM\18DEN1.SGM 18DEN1 77086 Federal Register / Vol. 73, No. 244 / Thursday, December 18, 2008 / Notices mstockstill on PROD1PC66 with NOTICES is sent only to existing retail customers and fewer than 25 prospective retail customers within a 30 calendar-day period. However, prior principal approval would be required if the market letter both (1) is sent to 25 or more existing retail customers and (2) makes a financial or investment recommendation or otherwise promotes a product or service of the member. In addition, similar to the manner in which other forms of correspondence (i.e., written letters and electronic mail messages) are addressed by NASD Rules 2210 and 2211, if a market letter were sent to 25 or more prospective retail customers within a 30-calendar day period, the market letter would fall within the definition of sales literature and have to be supervised as such, including approval by a registered principal prior to use. As correspondence, market letters would remain subject to the supervision and review requirements of NASD Rule 3010, which requires each firm to establish written procedures that are appropriate to its business, size, structure and customers for the review of outgoing correspondence. If these procedures do not require review of all correspondence prior to use or distribution, they must provide for the education and training of associated persons as to the firm’s procedures governing correspondence, documentation of such education and training, and surveillance and follow-up to ensure that such procedures are implemented and adhered to.7 The proposed rule changes would allow firms to distribute most market letters in a timely manner without requiring a registered principal to review each market letter prior to distribution, but would maintain investor protection by requiring firms to review such correspondence in accordance with mandated supervisory policies and procedures. The proposal also would create a new definition of the term ‘‘market letter’’ in NASD Rule 2211—and modify the existing definition in Incorporated NYSE Rule 472—to mean any communication specifically excepted from the definition of ‘‘research report’’ under NASD Rule 2711(a)(9)(A) and 7 See also Incorporated NYSE Rule 342. FINRA has proposed to amend the current requirements governing the supervision and review of correspondence. See Regulatory Notice 08–24 (May 2008) (Proposed Consolidated FINRA Rules Governing Supervision and Supervisory Controls). That proposal reorganized the supervision rules and codify existing guidance with respect to the supervision and review of correspondence. Thus, FINRA does not anticipate any significant changes to the supervision standards on which the proposed rule change is predicated. VerDate Aug<31>2005 17:51 Dec 17, 2008 Jkt 217001 Incorporated NYSE Rule 472.10(2)(a), respectively. This exception consists of: • Discussions of broad-based indices; • Commentaries on economic, political or market conditions; • Technical analyses concerning the demand and supply for a sector, index or industry based on trading volume and price; • Statistical summaries of multiple companies’ financial data, including listings of current ratings; • Recommendations regarding increasing or decreasing holdings in particular industries or sectors; and • Notices of ratings or price target changes (subject to certain disclosure requirements). FINRA proposed to define market letters by reference to an exception from the definition of ‘‘research report’’ in NASD Rule 2711 and Incorporated NYSE Rule 472 to make clear that a firm may not supervise as correspondence communications that fall within the definition of ‘‘research report.’’ The proposed rule change would, however, increase a firm’s flexibility in supervising market letter communications that do not qualify as research reports. III. Comment Letters The Commission received four comment letters on the proposal, all of which expressed support for the proposed rule change.8 For example, one commenter stated that it supported the effort to provide more timely information to a subset of investors while retaining procedures for review and supervision of correspondence and maintaining consistency across NASD and NYSE rules.9 IV. 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.10 In particular, the Commission believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,11 which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. The 8 See footnote 3. Cornell Letter. 10 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). 11 15 U.S.C. 78o–3(b)(6). 9 See PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 Commission concludes that the proposed rule would increase the flow of timely information to investors while providing appropriate safeguards from potential abuse and fraud. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,12 that the proposed rule change (SR–FINRA– 2008–044) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.13 Florence E. Harmon, Acting Secretary. [FR Doc. E8–30066 Filed 12–17–08; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–59091; File No. SR–FINRA– 2008–031] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change To Amend the Arbitration Uniform Submission Agreement and Related Rules December 12, 2008. I. Introduction The 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’’) on June 19, 2008, 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 amend the Uniform Submission Agreement (‘‘USA’’), which parties must sign prior to entering into arbitration, and certain rules of the Code of Arbitration Procedure for Customer Disputes (‘‘Customer Code’’) and the Code of Arbitration Procedure for Industry Disputes (‘‘Industry Code’’) that contain references to the agreement. The proposed rule change was published for comment in the Federal Register on July 16, 2008.3 The Commission received five comments in response to the proposed rule change. This order approves the proposed rule change. 12 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 See Securities Exchange Act Release No. 58124 (July 9, 2008), 73 FR 40890 (July 16, 2008) (SR– FINRA–2008–031) (notice). 13 17 E:\FR\FM\18DEN1.SGM 18DEN1

Agencies

[Federal Register Volume 73, Number 244 (Thursday, December 18, 2008)]
[Notices]
[Pages 77085-77086]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-30066]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59096; File No. SR-FINRA-2008-044]


Self-Regulatory Organizations: Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of Proposed Rule Change 
Relating to the Supervision of Market Letters

December 12, 2008.

I. Introduction

    On September 4, 2008, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), 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 relating to the supervision of 
market letters. The proposed rule change was published for comment in 
the Federal Register on October 1, 2008.\3\ The Commission received 
four comment letters on the proposal.\4\ This order approves the 
proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 58648 (September 25, 
2008); 73 FR 57177, 57179 (October 1, 2008).
    \4\ William A. Jacobson, The Cornell Securities Law Clinic 
(October 20, 2008) (the ``Cornell Letter''); Neal E Nakagiri, NPB 
Financial Group LLC (October 20, 2008); Dale E. Brown, Financial 
Services Institute (October 22, 2008); Michael Mungenast, president, 
ProEquities (Nov. 7, 2008).
---------------------------------------------------------------------------

II. Description of the Proposal

    FINRA proposed to amend NASD Rules 2210 (Communications with the 
Public) and 2211 (Institutional Sales Material and Correspondence) and 
Incorporated New York Stock Exchange (``NYSE'') Rule 472 
(Communications with the Public) to address the supervision of market 
letters.\5\ Among other things, the proposed rule change would amend 
the definition of ``sales literature'' in NASD Rule 2210 to exclude 
market letters that qualify as ``correspondence'' and would define 
``correspondence'' in NASD Rule 2211 to include market letters 
distributed by a member to one or more of its existing retail customers 
and fewer than 25 prospective retail customers within any 30 calendar-
day period.
---------------------------------------------------------------------------

    \5\ The FINRA rulebook currently includes (1) NASD Rules and (2) 
rules incorporated from NYSE (``Incorporated NYSE Rules''). While 
the NASD Rules generally apply to all FINRA members, the 
Incorporated NYSE Rules apply only to members of both FINRA and the 
NYSE, referred to as Dual Members.
---------------------------------------------------------------------------

    NASD Rule 2210 (Communications with the Public) requires a 
registered principal of a member to approve prior to use any item of 
sales literature. The term ``sales literature'' does not include any 
item distributed or made available only to institutional investors.\6\ 
``Sales literature'' includes ``market letters.'' Incorporated NYSE 
Rule 472 similarly requires a qualified person to approve in advance of 
distribution any market letter, but contains no exception for market 
letters sent only to institutional investors. FINRA is concerned that 
the pre-approval requirements may, in some circumstances, inhibit the 
flow of information to traders and other investors who base their 
investment decisions on timely market analysis.
---------------------------------------------------------------------------

    \6\ Pursuant to NASD Rule 2211(a)(2), communications of any kind 
sent only to institutional investors (as defined in NASD Rule 
2211(a)(3)) are considered to be ``institutional sales material.'' 
NASD Rule 2210 does not require approval of institutional sales 
material by a registered principal prior to use. However, 
institutional sales material remains subject to the supervision and 
review requirements of NASD Rule 2211(b)(1)(B).
---------------------------------------------------------------------------

    To address this concern, FINRA proposed to amend the definition of 
``sales literature'' in NASD Rule 2210 to exclude market letters that 
qualify as a ``correspondence'' and further to amend ``correspondence'' 
in NASD Rule 2211 to include market letters (as well as any written 
letter or electronic mail message) distributed by a member to one or 
more of its existing retail customers and fewer than 25 prospective 
retail customers within any 30 calendar-day period. Pursuant to NASD 
Rule 2211(b)(1)(A), correspondence does not require approval by a 
registered principal prior to use, unless such correspondence is 
distributed to 25 or more existing retail customers within any 30 
calendar-day period and makes a financial or investment recommendation 
or otherwise promotes a product or service of the member. The proposed 
rule change also would amend Incorporated NYSE Rule 472 to eliminate 
the requirement that a qualified person approve market letters in 
advance of distribution.
    Thus, under the proposed rule change, all FINRA members would be 
permitted under FINRA rules to distribute market letters to 
institutional investors (as defined in NASD Rule 2211(a)(3)) without 
requiring prior approval by a registered principal or qualified person. 
In addition, under the proposed rules, a member also could distribute 
without prior approval by a registered principal a market letter that

[[Page 77086]]

is sent only to existing retail customers and fewer than 25 prospective 
retail customers within a 30 calendar-day period. However, prior 
principal approval would be required if the market letter both (1) is 
sent to 25 or more existing retail customers and (2) makes a financial 
or investment recommendation or otherwise promotes a product or service 
of the member. In addition, similar to the manner in which other forms 
of correspondence (i.e., written letters and electronic mail messages) 
are addressed by NASD Rules 2210 and 2211, if a market letter were sent 
to 25 or more prospective retail customers within a 30-calendar day 
period, the market letter would fall within the definition of sales 
literature and have to be supervised as such, including approval by a 
registered principal prior to use.
    As correspondence, market letters would remain subject to the 
supervision and review requirements of NASD Rule 3010, which requires 
each firm to establish written procedures that are appropriate to its 
business, size, structure and customers for the review of outgoing 
correspondence. If these procedures do not require review of all 
correspondence prior to use or distribution, they must provide for the 
education and training of associated persons as to the firm's 
procedures governing correspondence, documentation of such education 
and training, and surveillance and follow-up to ensure that such 
procedures are implemented and adhered to.\7\
---------------------------------------------------------------------------

    \7\ See also Incorporated NYSE Rule 342. FINRA has proposed to 
amend the current requirements governing the supervision and review 
of correspondence. See Regulatory Notice 08-24 (May 2008) (Proposed 
Consolidated FINRA Rules Governing Supervision and Supervisory 
Controls). That proposal reorganized the supervision rules and 
codify existing guidance with respect to the supervision and review 
of correspondence. Thus, FINRA does not anticipate any significant 
changes to the supervision standards on which the proposed rule 
change is predicated.
---------------------------------------------------------------------------

    The proposed rule changes would allow firms to distribute most 
market letters in a timely manner without requiring a registered 
principal to review each market letter prior to distribution, but would 
maintain investor protection by requiring firms to review such 
correspondence in accordance with mandated supervisory policies and 
procedures.
    The proposal also would create a new definition of the term 
``market letter'' in NASD Rule 2211--and modify the existing definition 
in Incorporated NYSE Rule 472--to mean any communication specifically 
excepted from the definition of ``research report'' under NASD Rule 
2711(a)(9)(A) and Incorporated NYSE Rule 472.10(2)(a), respectively. 
This exception consists of:
     Discussions of broad-based indices;
     Commentaries on economic, political or market conditions;
     Technical analyses concerning the demand and supply for a 
sector, index or industry based on trading volume and price;
     Statistical summaries of multiple companies' financial 
data, including listings of current ratings;
     Recommendations regarding increasing or decreasing 
holdings in particular industries or sectors; and
     Notices of ratings or price target changes (subject to 
certain disclosure requirements).
    FINRA proposed to define market letters by reference to an 
exception from the definition of ``research report'' in NASD Rule 2711 
and Incorporated NYSE Rule 472 to make clear that a firm may not 
supervise as correspondence communications that fall within the 
definition of ``research report.'' The proposed rule change would, 
however, increase a firm's flexibility in supervising market letter 
communications that do not qualify as research reports.

III. Comment Letters

    The Commission received four comment letters on the proposal, all 
of which expressed support for the proposed rule change.\8\ For 
example, one commenter stated that it supported the effort to provide 
more timely information to a subset of investors while retaining 
procedures for review and supervision of correspondence and maintaining 
consistency across NASD and NYSE rules.\9\
---------------------------------------------------------------------------

    \8\ See footnote 3.
    \9\ See Cornell Letter.
---------------------------------------------------------------------------

IV. 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.\10\ In particular, the Commission believes that the 
proposed rule change is consistent with the provisions of Section 
15A(b)(6) of the Act,\11\ which requires, among other things, that 
FINRA rules must be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
and, in general, to protect investors and the public interest. The 
Commission concludes that the proposed rule would increase the flow of 
timely information to investors while providing appropriate safeguards 
from potential abuse and fraud.
---------------------------------------------------------------------------

    \10\ 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).
    \11\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-FINRA-2008-044) be, and 
hereby is, approved.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-30066 Filed 12-17-08; 8:45 am]
BILLING CODE 8011-01-P