Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Appoving Proposed Rule Change To Adopt NASD Rules 2360 and 2361 Into the Consolidated Rulebook as FINRA Rules 2130 and 2270, 62847-62849 [E9-28613]
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Federal Register / Vol. 229, No. 74 / Tuesday, December 1, 2009 / Notices
adequacy of information available to
investors in the registration of securities
and assures public availability. Form
18–K takes approximately 8 hours to
prepare and is filed by approximately
143 respondents for a total annual
reporting burden of 1,144 hours. We
estimate that 100% of the total burden
is prepared by the company.
Written comments are invited on: (a)
Whether this proposed collection of
information is necessary for the proper
performance of the functions of the
agency, including whether the
information will have practical utility;
(b) the accuracy of the agency’s estimate
of the burden imposed by the collection
of information; (c) ways to enhance the
quality, utility, and clarity of the
information collected; and (d) ways to
minimize the burden of the collection of
information on respondents, including
through the use of automated collection
techniques or other forms of information
technology. Consideration will be given
to comments and suggestions submitted
in writing within 60 days of this
publication.
Please direct your written comments
to Charles Boucher/CIO, Securities and
Exchange Commission, C/O Shirley
Martinson, 6432 General Green Way,
Alexandria, Virginia 22312; or send an
e-mail to: PRA_Mailbox@sec.gov.
Dated: November 24, 2009.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–28683 Filed 11–30–09; 8:45 am]
BILLING CODE 8011–01–P
mstockstill on DSKH9S0YB1PROD with NOTICES
Sunshine Act Meeting
Notice is hereby given, pursuant to
the provisions of the Government in the
Sunshine Act, Public Law 94–409, that
the Securities and Exchange
Commission will hold a Closed Meeting
on Thursday, December 3, 2009 at 2
p.m.
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the Closed Meeting. Certain
staff members who have an interest in
the matters also may be present.
The General Counsel of the
Commission, or his designee, has
certified that, in his opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c), (3), (5), (7), 9(B) and (10)
and 17 CFR 200.402(a)(3), (5), (7), 9(ii)
and (10), permit consideration of the
scheduled matters at the Closed
Meeting.
20:14 Nov 30, 2009
Jkt 220001
Dated: November 25, 2009.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–28813 Filed 11–27–09; 11:15
am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–61059; File No. SR–FINRA–
2009–059]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Appoving
Proposed Rule Change To Adopt
NASD Rules 2360 and 2361 Into the
Consolidated Rulebook as FINRA
Rules 2130 and 2270
November 24, 2009.
SECURITIES AND EXCHANGE
COMMISSION
VerDate Nov<24>2008
Commissioner Casey, as duty officer,
voted to consider the items listed for the
Closed Meeting in a closed session.
The subject matter of the Closed
Meeting scheduled for Thursday,
December 3, 2009 will be: Institution
and settlement of injunctive actions;
institution and settlement of
administrative proceedings;
adjudicatory matter; and other matters
relating to enforcement proceedings.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
For further information and to
ascertain what, if any, matters have been
added, deleted or postponed, please
contact:
The Office of the Secretary at (202)
551–5400.
I. Introduction
On September 9, 2009, 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 Rule 2360
(Approval Procedures for Day-Trading
Accounts) as FINRA Rule 2130 and to
adopt NASD Rule 2361 (Day-Trading
Risk Disclosure Statement) as FINRA
Rule 2270 in the consolidated FINRA
rulebook, with minor changes. The
proposed rule change was published for
comment in the Federal Register on
October 8, 2009.3 The Commission
received no comments on the proposal.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 60754
(Oct. 2, 2009), 74 FR 51886.
2 17
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Fmt 4703
Sfmt 4703
62847
This order approves the proposed rule
change.
II. Description of the Proposal
As part of the process of developing
a new consolidated rulebook (the
‘‘Consolidated FINRA Rulebook’’),4
FINRA proposed to adopt NASD Rules
2360 and 2361 as FINRA Rules 2130
and 2270. NASD Rules 2360 and 2361
focus on members’ obligations to
disclose to non-institutional customers 5
the basic risks of engaging in a ‘‘daytrading strategy’’ and to assess the
appropriateness of day-trading strategies
for such customers. The rules define a
‘‘day-trading strategy’’ as ‘‘an overall
trading strategy characterized by the
regular transmission by a customer of
intra-day orders to effect both purchase
and sale transactions in the same
security or securities.’’6 NASD Rule
2360 creates an obligation on members
that promote a day-trading strategy
regarding account-opening approval
procedures for non-institutional
customers. NASD Rule 2361 creates an
obligation on such members to disclose
to non-institutional customers the
unique risks of engaging in a daytrading strategy.
Approval Procedures for Day-Trading
Accounts
NASD Rule 2360 prohibits a member
promoting a day-trading strategy from
opening an account for a noninstitutional customer unless, prior to
opening the account, the member has
furnished the customer with a risk
disclosure statement (as described in
NASD Rule 2361) and has either (1)
approved the customer’s account for a
day-trading strategy and prepared a
record setting forth the basis for the
approval; or (2) obtained from the
customer a written agreement stating
that the customer does not intend to use
the account to engage in a day-trading
4 The current FINRA rulebook consists of (1)
FINRA Rules; (2) NASD Rules; and (3) rules
incorporated from NYSE (‘‘Incorporated NYSE
Rules’’) (together, the NASD Rules and Incorporated
NYSE Rules are referred to as the ‘‘Transitional
Rulebook’’). While the NASD Rules generally apply
to all FINRA members, the Incorporated NYSE
Rules apply only to those members of FINRA that
are also members of the NYSE (‘‘Dual Members’’).
The FINRA Rules apply to all FINRA members,
unless such rules have a more limited application
by their terms. For more information about the
rulebook consolidation process, see FINRA
Information Notice, March 12, 2008 (Rulebook
Consolidation Process).
5 For purposes of these rules, the term ‘‘noninstitutional customer’’ means a customer that does
not qualify as an ‘‘institutional account’’ under
NASD Rule 3110(c)(4). See NASD Rule 2360(f);
NASD Rule 2361(d). FINRA is proposing to adopt
NASD Rule 3110(c)(4) as FINRA Rule 4512(c). See
Regulatory Notice 08–25 (May 2008).
6 See NASD Rule 2360(e); NASD Rule 2361(c).
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Federal Register / Vol. 229, No. 74 / Tuesday, December 1, 2009 / Notices
strategy. The rule further requires that,
in order to approve a customer’s
account for a day-trading strategy, a
member must have reasonable grounds
to make a determination that a daytrading strategy is appropriate for the
customer.7
The proposed rule change would
transfer NASD Rule 2360 with the
following minor changes into the
Consolidated FINRA Rulebook as
FINRA Rule 2130. First, the proposed
rule change would add Supplementary
Material to clarify the concept of
‘‘promoting a day-trading strategy,’’
based on guidance provided in the 2000
FINRA Notice and the 2000 SEC
Approval Order, as follows:
.01 Promoting a Day-Trading Strategy.
(a) A member shall be deemed to be
‘‘promoting a day-trading strategy’’ if it
affirmatively endorses a ‘‘day-trading
strategy,’’ as defined in paragraph (e) of this
Rule, through advertising, its Web site,
training seminars or direct outreach
programs. For example, a member generally
shall be deemed to be ‘‘promoting a daytrading strategy’’ if its advertisements address
the benefits of day-trading, rapid-fire trading,
or momentum trading, or encourage persons
to trade or profit like a professional trader.
A member also shall be deemed to be
‘‘promoting a day-trading strategy’’ if it
promotes its day-trading services through a
third party. Moreover, the fact that many of
a member’s customers are engaging in a daytrading strategy will be relevant in
determining whether a member has promoted
itself in this way.8
Second, the proposed rule change
would add Supplementary Material,
based on guidance provided in the 2000
SEC Approval Order and the 2000
FINRA Notice, to specifically provide
that a member may submit advertising
materials to FINRA’s Advertising
Department for review and guidance on
whether the content of the
advertisement constitutes ‘‘promoting a
day-trading strategy,’’ as follows:
mstockstill on DSKH9S0YB1PROD with NOTICES
.02 Review by FINRA’s Advertising
Department. A member may submit its
advertisements to FINRA’s Advertising
Department for review and guidance on
whether the content of the advertisement
constitutes ‘‘promoting a day-trading
strategy’’ for purposes of this Rule.
7 In making such determination, the rule requires
a member to exercise reasonable diligence to
ascertain the essential facts relative to the customer,
including investment objectives, investment and
trading experience and knowledge, financial
situation, tax status, employment status, marital
status, number of dependents and age. See NASD
Rule 2360(b).
8 To enhance the readability of the rule, the
proposed rule change would relocate paragraph (g)
of Rule 2360 regarding those activities that would
not constitute ‘‘promoting a day-trading strategy,’’
as paragraph (b) of this new Supplementary
Material .01.
VerDate Nov<24>2008
20:14 Nov 30, 2009
Jkt 220001
Third, the proposed rule change
would add Supplementary Material to
alert members of additional FINRA rules
specifically addressing day-trading,
including the rule addressing the
Disclosure Statement (further discussed
below) and rules regarding margin
requirements.9
Finally, the proposal would make
minor changes to the rule to update
cross-references and format.
Day-Trading Risk Disclosure Statement
NASD Rule 2361 requires members
that promote a day-trading strategy to
deliver to their non-institutional
customers, prior to opening an account
for such customers, a risk disclosure
statement, as specified in paragraph (a)
of the rule (the ‘‘Disclosure
Statement’’).10 In addition, members
that promote a day-trading strategy must
post the Disclosure Statement on their
Web sites in a clear and conspicuous
manner. The Disclosure Statement
includes seven specific points,
described in more detail in the
statement itself, addressing the factors
that a customer should consider before
engaging in day-trading.
The proposed rule change would
transfer NASD Rule 2361 with the
following minor changes into the
Consolidated FINRA Rulebook as
FINRA Rule 2270.
First, the proposed rule change would
slightly modify the rule’s existing
provisions regarding form of delivery of
documents. Currently, the rule provides
that the disclosure statements may be
provided to individuals either ‘‘in
writing or electronically.’’ Because in
some circumstances electronic
documents may be considered a form of
‘‘writing,’’ the proposal would amend
the rule to clarify that the documents
may be provided ‘‘in paper or electronic
form.’’
Second, to comport with the proposed
revisions to NASD Rule 2360, the
proposed rule change would add a
statement to FINRA Rule 2270 that the
term ‘‘promoting a day-trading strategy’’
shall have the meaning as provided in
FINRA Rule 2130.
Third, the proposed rule change
would add Supplementary Materials
similar to those proposed to be added to
FINRA Rule 2130, as discussed above,
to specifically provide that a member
may submit advertising materials to
9 See proposed Supplementary Material .03 to
proposed FINRA Rule 2130.
10 The rule provides that, in lieu of the disclosure
statement specified in the rule, a member may use
an alternative disclosure statement, provided that it
is substantially similar to the specified disclosure
statement and is approved by FINRA’s Advertising
Department prior to use. See NASD Rule 2361(b).
PO 00000
Frm 00115
Fmt 4703
Sfmt 4703
FINRA’s Advertising Department for
review and guidance on whether the
content of the advertisement constitutes
‘‘promoting a day-trading strategy’’ and
to alert members of additional FINRA
rules specifically addressing daytrading.11
Finally, the proposed rule change
would make minor changes to the rule
to update cross-references and format.
III. Discussion
Day-trading raises unique investor
protection concerns. In general, day
traders seek to profit from very small
movements in the price of a security.
Such a strategy often requires aggressive
trading of a brokerage account and the
use of strategies including margin
trading and short selling. As a result,
day-trading generally requires a
significant amount of capital, a
sophisticated understanding of
securities markets and trading
techniques, and a high tolerance for
risk. Even experienced day traders with
in-depth knowledge of the securities
markets may suffer severe and
unexpected financial losses.
Firms that are actively promoting a
day-trading strategy should be
responsible for assessing whether the
strategy is appropriate for an individual
who opens a day-trading account at that
firm. These firms also should be
required to disclose the risks of
engaging in a day-trading strategy to an
individual prior to opening an account
for that individual. NASD Rules 2360
and 2361 were designed to assure that
firms promoting a day-trading strategy
check to make certain that day-trading
is an appropriate investment strategy for
a customer opening a day-trading
account and that the customer is aware
of its risks.
After careful review, the Commission
finds that transferring NASD Rules 2360
and 2361, with the changes specified
above, into the FINRA Consolidated
Rulebook as FINRA Rules 2130 and
2270 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 the
provisions of Section 15A(b)(6) of the
Act,13 which requires, among other
things, that FINRA rules be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
11 See proposed Supplementary Material .01 and
.02 to proposed FINRA Rule 2270.
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).
E:\FR\FM\01DEN1.SGM
01DEN1
Federal Register / Vol. 229, No. 74 / Tuesday, December 1, 2009 / Notices
equitable principles of trade, and, in
general, to protect investors and the
public interest.
More specifically, the Commission
believes requiring a member firm to
disclose the risks of day-trading to noninstitutional customers when the firm
promotes a day-trading strategy should
help alert individuals to the risks
associated with a day-trading strategy.
In addition, requiring a member firm to
determine whether a day-trading
strategy is appropriate for a customer
should help to assure that individuals
who are unable to bear the risks of daytrading, or who have investment
objectives incompatible with daytrading, are not approved for daytrading.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,14 that the
proposed rule change (SR–FINRA–
2009–059) be, and it hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–28613 Filed 11–30–09; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–61046; File No. SR–NYSE–
2009–114]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Modify the
Sample Broker Letters Set Forth In
Rule 451
mstockstill on DSKH9S0YB1PROD with NOTICES
November 20, 2009.
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
16, 2009, New York Stock Exchange
LLC (the ‘‘Exchange’’ or ‘‘NYSE’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Exchange has designated the
proposed rule change as constituting a
non-controversial rule change under
Rule 19b–4(f)(6) under the Act,3 which
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).
15 17
20:14 Nov 30, 2009
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Exchange Rule 451 and Sections 905.01,
905.02 and 905.03 of the Exchange’s
Listed Company Manual (the ‘‘Manual’’)
to amend the forms of letters contained
in those rules to reflect the recent
amendments to the Exchange’s broker
voting rules.
The text of the proposed rule change
is available on the Exchange’s Web site
(https://www.nyse.com), at the
Exchange’s Office of the Secretary 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, the
self-regulatory organization 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.
The NYSE 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
The Exchange recently amended
Exchange Rule 452 and Section 402.08
of the Manual to provide that brokers
which are record holders of shares held
in client accounts will no longer be
permitted to vote those shares in the
election of directors without
instructions from the beneficial holder
of those shares.4 The amendments take
effect for shareholder meetings held on
or after January 1, 2010, except to the
extent that a meeting was originally
scheduled to be held prior to such
effective date but was properly
adjourned to a date on or after such
effective date.5
4 See Securities Exchange Act Release No. 60215
(July 1, 2009) 74 FR 33293 (July 10, 2009) (SR–
NYSE–2006–92).
5 The amendment does not affect brokers voting
as record holders of shares of companies registered
under the Investment Company Act of 1940.
14 15
VerDate Nov<24>2008
renders the proposal effective upon
filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
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62849
Supplementary Material .20 to
Exchange Rule 451 and Sections 905.01,
905.02 and 905.03 contain specimens of
letters containing the information and
instructions required pursuant to the
proxy rules to be given by NYSE
member organizations to clients where
the member organization is the record
holder of shares beneficially owned by
those clients in the circumstances where
a broker (i) may vote on all proposals
without voting instructions (Section
905.01), (ii) may not vote on any
proposals without instructions (Section
905.02), and (ii) may vote on certain but
not all proposals without instructions
(Section 905.03). These letters are
shown as examples and not as
prescribed forms. Member organizations
are permitted to adapt the form of these
letters for their own purposes provided
all of the required information and
instructions are clearly enumerated in
letters to clients.
The Exchange is concerned that many
shareholders receiving proxy materials
from their brokers for meetings
scheduled after January 1, 2010 will not
be aware of the amendments to the
NYSE’s broker voting rules and may
therefore assume that the broker as
record holder will vote their shares on
the election of directors if they do not
return voting instructions to their
broker. The NYSE believes it is
important for as many shares as possible
to be voted in the election of directors
and, therefore, believes it is important to
educate retail investors with respect to
the implications of their failure to return
voting instructions under the amended
rules. Consequently, the Exchange
proposes to amend the forms of letters
provided for use in connection with
meetings where the broker may vote on
none of the proposals before the meeting
and meetings where the broker may vote
on some but not all of the proposals
before the meeting. The proposed
amendments will insert the following
language in those forms for use in
connection with meetings scheduled
after January 1, 2010:
Please note that, under a rule amendment
adopted by the New York Stock Exchange for
shareholder meetings held on or after January
1, 2010, brokers are no longer allowed to vote
shares held in their clients’ accounts on
uncontested elections of directors unless the
client has provided voting instructions (it
will continue to be the case that brokers
cannot vote their clients’ shares in contested
director elections). Consequently, if you want
us to vote your shares on your behalf on the
election of directors, you must provide voting
instructions to us. Voting on matters
presented at shareholders meetings,
particularly the election of directors, is the
primary method for shareholders to influence
the direction taken by a publicly-traded
E:\FR\FM\01DEN1.SGM
01DEN1
]]>Agencies
[Federal Register Volume 74, Number 229 (Tuesday, December 1, 2009)]
[Notices]
[Pages 62847-62849]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-28613]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61059; File No. SR-FINRA-2009-059]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Appoving Proposed Rule Change To Adopt NASD
Rules 2360 and 2361 Into the Consolidated Rulebook as FINRA Rules 2130
and 2270
November 24, 2009.
I. Introduction
On September 9, 2009, 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 Rule 2360 (Approval Procedures for
Day-Trading Accounts) as FINRA Rule 2130 and to adopt NASD Rule 2361
(Day-Trading Risk Disclosure Statement) as FINRA Rule 2270 in the
consolidated FINRA rulebook, with minor changes. The proposed rule
change was published for comment in the Federal Register on October 8,
2009.\3\ The Commission received no comments on the proposal. 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. 60754 (Oct. 2,
2009), 74 FR 51886.
---------------------------------------------------------------------------
II. Description of the Proposal
As part of the process of developing a new consolidated rulebook
(the ``Consolidated FINRA Rulebook''),\4\ FINRA proposed to adopt NASD
Rules 2360 and 2361 as FINRA Rules 2130 and 2270. NASD Rules 2360 and
2361 focus on members' obligations to disclose to non-institutional
customers \5\ the basic risks of engaging in a ``day-trading strategy''
and to assess the appropriateness of day-trading strategies for such
customers. The rules define a ``day-trading strategy'' as ``an overall
trading strategy characterized by the regular transmission by a
customer of intra-day orders to effect both purchase and sale
transactions in the same security or securities.''\6\ NASD Rule 2360
creates an obligation on members that promote a day-trading strategy
regarding account-opening approval procedures for non-institutional
customers. NASD Rule 2361 creates an obligation on such members to
disclose to non-institutional customers the unique risks of engaging in
a day-trading strategy.
---------------------------------------------------------------------------
\4\ The current FINRA rulebook consists of (1) FINRA Rules; (2)
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated
NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules
are referred to as the ``Transitional Rulebook''). While the NASD
Rules generally apply to all FINRA members, the Incorporated NYSE
Rules apply only to those members of FINRA that are also members of
the NYSE (``Dual Members''). The FINRA Rules apply to all FINRA
members, unless such rules have a more limited application by their
terms. For more information about the rulebook consolidation
process, see FINRA Information Notice, March 12, 2008 (Rulebook
Consolidation Process).
\5\ For purposes of these rules, the term ``non-institutional
customer'' means a customer that does not qualify as an
``institutional account'' under NASD Rule 3110(c)(4). See NASD Rule
2360(f); NASD Rule 2361(d). FINRA is proposing to adopt NASD Rule
3110(c)(4) as FINRA Rule 4512(c). See Regulatory Notice 08-25 (May
2008).
\6\ See NASD Rule 2360(e); NASD Rule 2361(c).
---------------------------------------------------------------------------
Approval Procedures for Day-Trading Accounts
NASD Rule 2360 prohibits a member promoting a day-trading strategy
from opening an account for a non-institutional customer unless, prior
to opening the account, the member has furnished the customer with a
risk disclosure statement (as described in NASD Rule 2361) and has
either (1) approved the customer's account for a day-trading strategy
and prepared a record setting forth the basis for the approval; or (2)
obtained from the customer a written agreement stating that the
customer does not intend to use the account to engage in a day-trading
[[Page 62848]]
strategy. The rule further requires that, in order to approve a
customer's account for a day-trading strategy, a member must have
reasonable grounds to make a determination that a day-trading strategy
is appropriate for the customer.\7\
---------------------------------------------------------------------------
\7\ In making such determination, the rule requires a member to
exercise reasonable diligence to ascertain the essential facts
relative to the customer, including investment objectives,
investment and trading experience and knowledge, financial
situation, tax status, employment status, marital status, number of
dependents and age. See NASD Rule 2360(b).
---------------------------------------------------------------------------
The proposed rule change would transfer NASD Rule 2360 with the
following minor changes into the Consolidated FINRA Rulebook as FINRA
Rule 2130. First, the proposed rule change would add Supplementary
Material to clarify the concept of ``promoting a day-trading
strategy,'' based on guidance provided in the 2000 FINRA Notice and the
2000 SEC Approval Order, as follows:
.01 Promoting a Day-Trading Strategy.
(a) A member shall be deemed to be ``promoting a day-trading
strategy'' if it affirmatively endorses a ``day-trading strategy,''
as defined in paragraph (e) of this Rule, through advertising, its
Web site, training seminars or direct outreach programs. For
example, a member generally shall be deemed to be ``promoting a day-
trading strategy'' if its advertisements address the benefits of
day-trading, rapid-fire trading, or momentum trading, or encourage
persons to trade or profit like a professional trader. A member also
shall be deemed to be ``promoting a day-trading strategy'' if it
promotes its day-trading services through a third party. Moreover,
the fact that many of a member's customers are engaging in a day-
trading strategy will be relevant in determining whether a member
has promoted itself in this way.\8\
---------------------------------------------------------------------------
\8\ To enhance the readability of the rule, the proposed rule
change would relocate paragraph (g) of Rule 2360 regarding those
activities that would not constitute ``promoting a day-trading
strategy,'' as paragraph (b) of this new Supplementary Material .01.
Second, the proposed rule change would add Supplementary Material,
based on guidance provided in the 2000 SEC Approval Order and the 2000
FINRA Notice, to specifically provide that a member may submit
advertising materials to FINRA's Advertising Department for review and
guidance on whether the content of the advertisement constitutes
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``promoting a day-trading strategy,'' as follows:
.02 Review by FINRA's Advertising Department. A member may
submit its advertisements to FINRA's Advertising Department for
review and guidance on whether the content of the advertisement
constitutes ``promoting a day-trading strategy'' for purposes of
this Rule.
Third, the proposed rule change would add Supplementary Material to
alert members of additional FINRA rules specifically addressing day-
trading, including the rule addressing the Disclosure Statement
(further discussed below) and rules regarding margin requirements.\9\
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\9\ See proposed Supplementary Material .03 to proposed FINRA
Rule 2130.
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Finally, the proposal would make minor changes to the rule to
update cross-references and format.
Day-Trading Risk Disclosure Statement
NASD Rule 2361 requires members that promote a day-trading strategy
to deliver to their non-institutional customers, prior to opening an
account for such customers, a risk disclosure statement, as specified
in paragraph (a) of the rule (the ``Disclosure Statement'').\10\ In
addition, members that promote a day-trading strategy must post the
Disclosure Statement on their Web sites in a clear and conspicuous
manner. The Disclosure Statement includes seven specific points,
described in more detail in the statement itself, addressing the
factors that a customer should consider before engaging in day-trading.
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\10\ The rule provides that, in lieu of the disclosure statement
specified in the rule, a member may use an alternative disclosure
statement, provided that it is substantially similar to the
specified disclosure statement and is approved by FINRA's
Advertising Department prior to use. See NASD Rule 2361(b).
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The proposed rule change would transfer NASD Rule 2361 with the
following minor changes into the Consolidated FINRA Rulebook as FINRA
Rule 2270.
First, the proposed rule change would slightly modify the rule's
existing provisions regarding form of delivery of documents. Currently,
the rule provides that the disclosure statements may be provided to
individuals either ``in writing or electronically.'' Because in some
circumstances electronic documents may be considered a form of
``writing,'' the proposal would amend the rule to clarify that the
documents may be provided ``in paper or electronic form.''
Second, to comport with the proposed revisions to NASD Rule 2360,
the proposed rule change would add a statement to FINRA Rule 2270 that
the term ``promoting a day-trading strategy'' shall have the meaning as
provided in FINRA Rule 2130.
Third, the proposed rule change would add Supplementary Materials
similar to those proposed to be added to FINRA Rule 2130, as discussed
above, to specifically provide that a member may submit advertising
materials to FINRA's Advertising Department for review and guidance on
whether the content of the advertisement constitutes ``promoting a day-
trading strategy'' and to alert members of additional FINRA rules
specifically addressing day-trading.\11\
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\11\ See proposed Supplementary Material .01 and .02 to proposed
FINRA Rule 2270.
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Finally, the proposed rule change would make minor changes to the
rule to update cross-references and format.
III. Discussion
Day-trading raises unique investor protection concerns. In general,
day traders seek to profit from very small movements in the price of a
security. Such a strategy often requires aggressive trading of a
brokerage account and the use of strategies including margin trading
and short selling. As a result, day-trading generally requires a
significant amount of capital, a sophisticated understanding of
securities markets and trading techniques, and a high tolerance for
risk. Even experienced day traders with in-depth knowledge of the
securities markets may suffer severe and unexpected financial losses.
Firms that are actively promoting a day-trading strategy should be
responsible for assessing whether the strategy is appropriate for an
individual who opens a day-trading account at that firm. These firms
also should be required to disclose the risks of engaging in a day-
trading strategy to an individual prior to opening an account for that
individual. NASD Rules 2360 and 2361 were designed to assure that firms
promoting a day-trading strategy check to make certain that day-trading
is an appropriate investment strategy for a customer opening a day-
trading account and that the customer is aware of its risks.
After careful review, the Commission finds that transferring NASD
Rules 2360 and 2361, with the changes specified above, into the FINRA
Consolidated Rulebook as FINRA Rules 2130 and 2270 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 the
provisions of Section 15A(b)(6) of the Act,\13\ which requires, among
other things, that FINRA rules be designed to prevent fraudulent and
manipulative acts and practices, to promote just and
[[Page 62849]]
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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More specifically, the Commission believes requiring a member firm
to disclose the risks of day-trading to non-institutional customers
when the firm promotes a day-trading strategy should help alert
individuals to the risks associated with a day-trading strategy. In
addition, requiring a member firm to determine whether a day-trading
strategy is appropriate for a customer should help to assure that
individuals who are unable to bear the risks of day-trading, or who
have investment objectives incompatible with day-trading, are not
approved for day-trading.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (SR-FINRA-2009-059) be, and it
hereby is, approved.
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\14\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12)
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Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-28613 Filed 11-30-09; 8:45 am]
BILLING CODE 8011-01-P
