Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change To Adopt FINRA Rule 3240 (Borrowing From or Lending to Customers) in the Consolidated FINRA Rulebook, 8772-8774 [2010-3775]
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Federal Register / Vol. 75, No. 37 / Thursday, February 25, 2010 / Notices
with such member’s usual practice or as
required by any State or Federal
securities laws, or any rule or regulation
thereunder.
FINRA proposed amending the
requirements of NASD Rule 2270 to
provide an alternative means of
satisfying the requirement that members
make balance sheet information
available to bona fide regular customers.
Currently, the rule requires that
members ‘‘make available to inspection
by any bona fide regular customer, upon
request, the information relative to such
member’s financial condition as
disclosed in its most recent balance
sheet * * *.’’ FINRA proposed
providing members with the option of
delivering their balance sheet, in paper
or electronic form, to customers who
request it. With respect to electronic
delivery, the requesting customer must
consent to receive the balance sheet in
electronic form to ensure that such
information is accessible to the
customer. FINRA did not propose
requiring members to deliver their
balance sheet to all customers (instead
of making them available to inspection
or delivering them upon request)
because Rule 17a–5(c) under the Act 6
generally requires a broker-dealer that
carries customer accounts to send its
full balance sheet and certain other
financial information to each of its
customers twice a year.7 NASD Rule
2270 provides customers with
additional access to their broker’s
balance sheet information by requiring
that members permit customers to
inspect or obtain a copy of a member’s
most recent balance sheet at any time
upon request.
NASD Rule 2910 requires any
member that is a party to an open
transaction or who has on deposit cash
or securities of another member to
furnish, upon the written request of the
other member, a statement of its
financial condition as disclosed in its
most recently prepared balance sheet.
FINRA proposed amending the
provisions of NASD Rule 2910 to
require, consistent with NASD Rule
2270, that members provide to other
members the balance sheet that was
‘‘prepared either in accordance with
6 17
CFR 240.17a–5(c).
Rule 17a–5(c)(5) contains a conditional
exemption from the requirement that broker-dealers
semi-annually send customers a full balance sheet.
Under the exemption, a broker-dealer can semiannually send its customers summary information
regarding its net capital, as long as it also provides
customers with a toll-free number to call for a free
copy of its full balance sheet, makes its full balance
sheet available to customers on its Web site, and
meets other specified requirements. See Securities
Exchange Act Release No. 48272 (August 1, 2003),
68 FR 46446 (August 6, 2003).
jlentini on DSKJ8SOYB1PROD with NOTICES
7 SEC
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such member’s usual practice or as
required by any State or Federal
securities laws, or any rule or regulation
thereunder.’’ In addition, FINRA
proposed that members be permitted to
provide their balance sheet to other
members in paper or electronic form.
However, unlike the proposed
amendments to NASD Rule 2270,
FINRA did not propose requiring
members to obtain the consent of other
members to electronically deliver the
balance sheet. FINRA believes that other
members, unlike all customers, will be
equipped to receive electronic delivery.
FINRA believes that the requirements
of NASD Rule 2270 and NASD Rule
2910 continue to provide access to
important information by allowing
customers and other members to have
access to a copy of a member’s most
recent balance sheet at any time upon
request and should be transferred, as
amended, to the Consolidated FINRA
Rulebook as FINRA Rule 2261.
FINRA will announce the
implementation date of the proposed
rule change in a Regulatory Notice to be
published no later than 90 days
following Commission approval.
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.8 In particular, the
Commission finds that the proposal is
consistent with Section 15A(b)(6) of the
Act,9 which requires, among other
things, that FINRA’s rules be designed
to prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest. The Commission
believes that the proposed rule change
will further the purposes of the Act by,
among other things, ensuring that basic,
current information regarding the
financial condition of members with
which customers and other members
conduct business is available upon
request. The Commission therefore
believes that it is appropriate and
consistent with the Act for FINRA to
Adopt FINRA Rule 2261 (Disclosure of
Financial Condition) in the
Consolidated FINRA Rulebook.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,10 that the
proposed rule change (SR–FINRA–
2009–081) is approved.
8 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
9 15 U.S.C. 78o–3(b)(6).
10 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–3778 Filed 2–24–10; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–61537; File No. SR–FINRA–
2009–095]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving
Proposed Rule Change To Adopt
FINRA Rule 3240 (Borrowing From or
Lending to Customers) in the
Consolidated FINRA Rulebook
February 18, 2010.
I. Introduction
On December 31, 2009, 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’’),
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 2370 (Borrowing From or Lending
to Customers) as FINRA Rule 3240
(Borrowing From or Lending to
Customers) in the Consolidated FINRA
Rulebook 3 with certain changes and to
delete Incorporated NYSE Rules 352(e)
(Limitations on Borrowing From or
Lending to Customers), (f) (Loan
Procedures) and (g). The proposed rule
change would also add a Supplementary
Material section regarding record
retention requirements to proposed
FINRA Rule 3240. The proposed rule
change was published for comment in
the Federal Register on January 12,
2010.4 The Commission received no
11 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 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 Information
Notice, March 12, 2008 (Rulebook Consolidation
Process).
4 See Securities Exchange Act Release No. 61302
(January 6, 2010), 75 FR 1672 (January 12, 2010).
1 15
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Federal Register / Vol. 75, No. 37 / Thursday, February 25, 2010 / Notices
comments on the proposed rule change.
This order approves the proposed rule
change.
II. Description of the Proposed Rule
Change
FINRA proposed adopting NASD Rule
2370 as FINRA Rule 3240 in the
Consolidated FINRA Rulebook with
certain changes as described below.
FINRA also proposed deleting
Incorporated NYSE Rules 352(e)
through (g) 5 from the Transitional
Rulebook.6 Further, the proposed rule
change would also add a Supplementary
Material section regarding record
retention requirements to proposed
FINRA Rule 3240.
jlentini on DSKJ8SOYB1PROD with NOTICES
A. Background
The purpose of NASD Rule 2370 is to
give FINRA member broker-dealers the
opportunity to evaluate the
appropriateness of particular lending
arrangements between their registered
persons and customers, to the extent
permitted by the member, and the
potential for conflicts of interests
between both the registered person and
his or her customer and the registered
person and the member with which he
or she is associated.
To that end, NASD Rule 2370
prohibits registered persons from
borrowing money from or lending
money to their customers (collectively
referred to as ‘‘lending arrangements’’)
unless certain conditions are met.
Specifically, under Rule 2370, no
registered person may borrow money
from or lend money to his or her
customer unless the firm has written
procedures allowing such lending
arrangements and (1) the customer is a
member of the registered person’s
immediate family; 7 (2) the customer is
in the business of lending money; (3)
the customer and the registered person
are both registered persons of the same
firm; (4) the lending arrangement is
based on a personal relationship outside
of the broker-customer relationship; or
(5) the lending arrangement is based on
a business relationship outside of the
broker-customer relationship. In
addition, with the exception of lending
5 For convenience, the Incorporated NYSE Rules
are referred to as the NYSE Rules.
6 NYSE Rules 352(a) through (d) were deleted as
part of a prior rule change. See Securities Exchange
Act Release No. 60701 (September 21, 2009), 74 FR
49425 (September 28, 2009) (Order Approving File
No. SR–FINRA–2009–014).
7 NASD Rule 2370 defines the term ‘‘immediate
family’’ to include parents, grandparents, mother-inlaw or father-in-law, husband or wife, brother or
sister, brother-in-law or sister-in-law, son-in-law or
daughter-in-law, children, grandchildren, cousin,
aunt or uncle, or niece or nephew, and any other
person whom the registered person supports,
directly or indirectly, to a material extent.
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arrangements between immediate family
members and lending arrangements
between registered persons and
customers in the business of lending
money, FINRA members are required to
pre-approve in writing the other lending
arrangements described above.
With respect to lending arrangements
between immediate family members, a
FINRA member’s written procedures
may indicate that the member permits
such lending arrangements and that
registered persons need not notify the
member or receive member approval for
such lending arrangements.
For lending arrangements between
registered persons and customers in the
business of lending money, a member’s
written procedures may indicate that
registered persons are not required to
notify the member or receive member
approval for such lending arrangements,
provided that such lending
arrangements have been made on
commercial terms that the customer
generally makes available to members of
the general public who are similarly
situated as to need, purpose and
creditworthiness.8 Further, the member
need not investigate such lending
arrangements, but may rely on the
registered person’s representation that
the terms of the loan meet these
standards.
It is important to note that members
can choose to permit registered persons
to borrow money from or lend money to
their customers consistent with the
requirements of the rule or prohibit the
practice in whole or in part.
NYSE Rules 352(e) through (g) also
govern lending arrangements between
registered persons and their customers.
These provisions are substantially
similar to the provisions of NASD Rule
2370, with one exception. NYSE Rule
352(f) provides an exception from the
pre-approval requirements of the rule
for loans totaling $100 or less between
registered persons of the same firm.
B. Proposal
FINRA proposed adopting NASD Rule
2370 as FINRA Rule 3240 in the
Consolidated FINRA Rulebook, subject
to the following changes. FINRA
proposed amending paragraph (a)
(Permissible Lending Arrangements;
Conditions) of the rule to indicate more
explicitly that such arrangements are
subject to the procedural requirements
set forth in paragraph (b) (Notification
and Approval) of the rule. FINRA also
8 The fact that a registered person can negotiate
a better rate or terms for a loan that is not the
product of the broker-customer relationship would
not vitiate the idea that the loan occurred on terms
generally offered to the public. See Notice to
Members 04–14 (March 2004).
PO 00000
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8773
proposed amending paragraph (a)(2)(B)
of the rule regarding permissible
lending arrangements between
registered persons and customers in the
business of lending money to indicate
more explicitly that such customers
must be acting in the course of such
business.
Further, FINRA proposed amending
paragraph (b)(1) of the rule to require
expressly that registered persons notify
their member firms of the lending
arrangements that require member preapproval (FINRA proposed this change
for purposes of consistency with
paragraphs (b)(2) and (3) of the rule,
which provide that a registered person
is not required either to notify the
member or receive member approval for
certain specified lending arrangements)
and to clarify that any modifications to
such lending arrangements (including
any extension of the duration of such
arrangements) are also subject to
notification and member pre-approval.
In addition, FINRA proposed
amending the definition of ‘‘immediate
family’’ in paragraph (c) (Definition of
Immediate Family) of the rule to replace
the reference that the term ‘‘includes’’
the enumerated persons to reflect that
the term ‘‘means’’ such persons. Finally,
FINRA proposed adding Supplementary
Material .01 (Record Retention)
requiring that members preserve the
written pre-approval required by the
rule for at least three years after the date
that the lending arrangement has
terminated or for at least three years
after the registered person’s association
with the member has terminated. FINRA
proposed deleting NYSE Rules 352(e)
through (g) as the provisions of the
NYSE rules are substantially similar to
NASD Rule 2370.
FINRA will announce the
implementation date of the proposed
rule change in a Regulatory Notice to be
published no later than 90 days
following Commission approval. The
implementation date will be no later
than 180 days following Commission
approval.
III. Discussion and Findings
After a careful review of the proposal,
the Commission finds that the proposed
rule change is consistent with the
requirements of the Exchange Act and
the rules and regulations thereunder
applicable to FINRA.9 In particular, the
Commission finds that the proposed
rule change is consistent with Section
9 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
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8774
Federal Register / Vol. 75, No. 37 / Thursday, February 25, 2010 / Notices
15A(b)(6) of the Exchange Act,10 which
requires, among other things, that
FINRA’s rules be designed to prevent
fraud and manipulative practices and to
promote just and equitable principles of
trade and, in general, to protect
investors and the public interest. The
Commission believes that the proposed
rule change is reasonably designed to
achieve these ends by providing FINRA
member broker-dealers the opportunity
to evaluate the appropriateness of
certain lending arrangements between
their registered persons and others, to
the extent permitted by a FINRA
member broker-dealer, and the potential
that these lending arrangements could
create certain conflicts of interest.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,11
that the proposed rule change (SR–
FINRA–2009–095) be, and hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–3775 Filed 2–24–10; 8:45 am]
BILLING CODE 8011–01–P
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 those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–61535; File No. SR–
NYSEAmex–2010–14]
Self-Regulatory Organizations; NYSE
Amex LLC; Notice of Filing of
Proposed Rule Change Amending
Position Limits for Certain Exchange
Traded Funds
February 18, 2010.
jlentini on DSKJ8SOYB1PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to (a) amend
the Position Limits for certain highly
liquid Exchange Traded Funds (‘‘ETFs’’);
(b) memorialize a previously approved
provision that was never inserted in the
Exchange’s Rules, as well as clarify its
applicable scope, and (c) amend certain
rules to define certain contract terms.
The text of the proposed rule change is
available on NYSE Amex’s Web site at
(https://www.nyse.com), on the
Commission’s Web site at https://
www.sec.gov, at NYSE Amex, and at the
Commission’s Public Reference Room.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘Act’’
or ‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on February 17, 2010, NYSE Amex LLC
(‘‘NYSE Amex’’ or ‘‘Exchange’’) 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 Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
1. Purpose
The purpose of this filing is to (a)
eliminate Position Limits in certain
highly active ETFs, (b) memorialize a
previously approved provision that was
never inserted in the Exchange’s Rules,
as well as clarify its applicable scope,
and (c) amend certain rules to define
certain contract terms. The provision at
issue—allowing for option contracts on
ETFs that overly 1,000 shares (‘‘Jumbo
options’’)—was approved in 1998, but
did not include changes to Rule Text at
that time.3 In order to resume listing
these products, the Exchange is
proposing to restrict the listing of Jumbo
options to four specific ETFs that have
no Position Limit (as proposed below),
and also define how strike prices and
premiums will be expressed for Jumbo
contracts by amending Rule 903 and
Rule 959NY.4
3 Exchange
Act Release No. 40157, File No. SR–
Amex–96–44 (July 1, 1998) 63 FR 37426 (July 10,
1998).
4 SR–Amex–96–44 was also silent on the manner
of expressing strike prices and premium bids and
offers, thus it is necessary to define them in this
filing.
10 15
U.S.C. 78o–3(b)(6).
U.S.C. 78s(b)(2).
12 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
11 15
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16:34 Feb 24, 2010
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Frm 00130
Fmt 4703
Sfmt 4703
Position Limits
Four ETFs have been approved under
NYSE Amex Rule 904 to have
exceptional Position Limits. These are
NASDAQ 100 Tracking Stock (QQQQ);
SPDR S&P 500 ETF (SPY); iShares
Russell 2000 Index Fund (IWM); and
DIAMONDS Trust (DIA). NYSE Amex
proposes that these four ETFs have no
Position Limit.
Position and Exercise limits were
introduced as a means of forestalling the
potential manipulation of an equity’s
price by someone that established a
large option position. This concern was
mitigated with cash settled index
options since the contract settled for
cash as opposed to physical shares of
stock. Additionally, those index options
whose position limits have been
eliminated are based on a broad based
index comprised of many equities
further mitigating concerns about
manipulation through the establishment
and subsequent exercise of a large
options position. This resulted in a
repeal of position and exercise limits for
the options on the aforementioned
broad based indexes.5
While ETF options are physically
settled, NYSE Amex feels that there are
specific aspects related to an ETF’s
structure that serve to mitigate any
concerns about manipulation and allow
eliminating position limits on a narrow
subset of the ETF option universe. First,
ETF’s are structured as open-ended
trusts or mutual funds that can
continually issue new shares as required
to satisfy demand. This is in sharp
contrast to an equity that has a float that
is only increased by corporate action
and is not a function of investor
demand. Second, the ETF itself is
comprised of a basket of stocks,
specifically those that comprise a
benchmark broad based index.
Additionally, in approving the
elimination of position and exercise
limits for RUT, NDX, DJX, and SPX
options, the Commission considered the
capitalization of the components of each
of these indexes and the deep and liquid
markets for the securities underlying
each index significantly reduced
concerns of market manipulation or
disruption in the underlying markets.
Shares in these four underlying ETFs
have exceptionally high trading volume,
demonstrating extraordinary liquidity.
The volume for each of these ETFs for
5 See Securities Exchange Act Release No. 56351
(September 4, 2007); see also Securities Exchange
Act Release No. 52649 (October 21, 2005), 70 FR
62146 (October 28, 2005) (SR–Amex–2005–063)
(‘‘NDX Approval Order’’); see also Securities
Exchange Act Release No. 46393 (August 21, 2002),
67 FR 55289 (August 28, 2002) (SR–Amex–2002–
31) (‘‘XMI/XII Permanent Approval Order’’).
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]]>Agencies
[Federal Register Volume 75, Number 37 (Thursday, February 25, 2010)]
[Notices]
[Pages 8772-8774]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-3775]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61537; File No. SR-FINRA-2009-095]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change To Adopt FINRA
Rule 3240 (Borrowing From or Lending to Customers) in the Consolidated
FINRA Rulebook
February 18, 2010.
I. Introduction
On December 31, 2009, 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''), 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 2370 (Borrowing From or Lending
to Customers) as FINRA Rule 3240 (Borrowing From or Lending to
Customers) in the Consolidated FINRA Rulebook \3\ with certain changes
and to delete Incorporated NYSE Rules 352(e) (Limitations on Borrowing
From or Lending to Customers), (f) (Loan Procedures) and (g). The
proposed rule change would also add a Supplementary Material section
regarding record retention requirements to proposed FINRA Rule 3240.
The proposed rule change was published for comment in the Federal
Register on January 12, 2010.\4\ The Commission received no
[[Page 8773]]
comments on the proposed rule change. This order approves the proposed
rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 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 Information Notice, March 12, 2008 (Rulebook
Consolidation Process).
\4\ See Securities Exchange Act Release No. 61302 (January 6,
2010), 75 FR 1672 (January 12, 2010).
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
FINRA proposed adopting NASD Rule 2370 as FINRA Rule 3240 in the
Consolidated FINRA Rulebook with certain changes as described below.
FINRA also proposed deleting Incorporated NYSE Rules 352(e) through (g)
\5\ from the Transitional Rulebook.\6\ Further, the proposed rule
change would also add a Supplementary Material section regarding record
retention requirements to proposed FINRA Rule 3240.
---------------------------------------------------------------------------
\5\ For convenience, the Incorporated NYSE Rules are referred to
as the NYSE Rules.
\6\ NYSE Rules 352(a) through (d) were deleted as part of a
prior rule change. See Securities Exchange Act Release No. 60701
(September 21, 2009), 74 FR 49425 (September 28, 2009) (Order
Approving File No. SR-FINRA-2009-014).
---------------------------------------------------------------------------
A. Background
The purpose of NASD Rule 2370 is to give FINRA member broker-
dealers the opportunity to evaluate the appropriateness of particular
lending arrangements between their registered persons and customers, to
the extent permitted by the member, and the potential for conflicts of
interests between both the registered person and his or her customer
and the registered person and the member with which he or she is
associated.
To that end, NASD Rule 2370 prohibits registered persons from
borrowing money from or lending money to their customers (collectively
referred to as ``lending arrangements'') unless certain conditions are
met. Specifically, under Rule 2370, no registered person may borrow
money from or lend money to his or her customer unless the firm has
written procedures allowing such lending arrangements and (1) the
customer is a member of the registered person's immediate family; \7\
(2) the customer is in the business of lending money; (3) the customer
and the registered person are both registered persons of the same firm;
(4) the lending arrangement is based on a personal relationship outside
of the broker-customer relationship; or (5) the lending arrangement is
based on a business relationship outside of the broker-customer
relationship. In addition, with the exception of lending arrangements
between immediate family members and lending arrangements between
registered persons and customers in the business of lending money,
FINRA members are required to pre-approve in writing the other lending
arrangements described above.
---------------------------------------------------------------------------
\7\ NASD Rule 2370 defines the term ``immediate family'' to
include parents, grandparents, mother-in-law or father-in-law,
husband or wife, brother or sister, brother-in-law or sister-in-law,
son-in-law or daughter-in-law, children, grandchildren, cousin, aunt
or uncle, or niece or nephew, and any other person whom the
registered person supports, directly or indirectly, to a material
extent.
---------------------------------------------------------------------------
With respect to lending arrangements between immediate family
members, a FINRA member's written procedures may indicate that the
member permits such lending arrangements and that registered persons
need not notify the member or receive member approval for such lending
arrangements.
For lending arrangements between registered persons and customers
in the business of lending money, a member's written procedures may
indicate that registered persons are not required to notify the member
or receive member approval for such lending arrangements, provided that
such lending arrangements have been made on commercial terms that the
customer generally makes available to members of the general public who
are similarly situated as to need, purpose and creditworthiness.\8\
Further, the member need not investigate such lending arrangements, but
may rely on the registered person's representation that the terms of
the loan meet these standards.
---------------------------------------------------------------------------
\8\ The fact that a registered person can negotiate a better
rate or terms for a loan that is not the product of the broker-
customer relationship would not vitiate the idea that the loan
occurred on terms generally offered to the public. See Notice to
Members 04-14 (March 2004).
---------------------------------------------------------------------------
It is important to note that members can choose to permit
registered persons to borrow money from or lend money to their
customers consistent with the requirements of the rule or prohibit the
practice in whole or in part.
NYSE Rules 352(e) through (g) also govern lending arrangements
between registered persons and their customers. These provisions are
substantially similar to the provisions of NASD Rule 2370, with one
exception. NYSE Rule 352(f) provides an exception from the pre-approval
requirements of the rule for loans totaling $100 or less between
registered persons of the same firm.
B. Proposal
FINRA proposed adopting NASD Rule 2370 as FINRA Rule 3240 in the
Consolidated FINRA Rulebook, subject to the following changes. FINRA
proposed amending paragraph (a) (Permissible Lending Arrangements;
Conditions) of the rule to indicate more explicitly that such
arrangements are subject to the procedural requirements set forth in
paragraph (b) (Notification and Approval) of the rule. FINRA also
proposed amending paragraph (a)(2)(B) of the rule regarding permissible
lending arrangements between registered persons and customers in the
business of lending money to indicate more explicitly that such
customers must be acting in the course of such business.
Further, FINRA proposed amending paragraph (b)(1) of the rule to
require expressly that registered persons notify their member firms of
the lending arrangements that require member pre-approval (FINRA
proposed this change for purposes of consistency with paragraphs (b)(2)
and (3) of the rule, which provide that a registered person is not
required either to notify the member or receive member approval for
certain specified lending arrangements) and to clarify that any
modifications to such lending arrangements (including any extension of
the duration of such arrangements) are also subject to notification and
member pre-approval.
In addition, FINRA proposed amending the definition of ``immediate
family'' in paragraph (c) (Definition of Immediate Family) of the rule
to replace the reference that the term ``includes'' the enumerated
persons to reflect that the term ``means'' such persons. Finally, FINRA
proposed adding Supplementary Material .01 (Record Retention) requiring
that members preserve the written pre-approval required by the rule for
at least three years after the date that the lending arrangement has
terminated or for at least three years after the registered person's
association with the member has terminated. FINRA proposed deleting
NYSE Rules 352(e) through (g) as the provisions of the NYSE rules are
substantially similar to NASD Rule 2370.
FINRA will announce the implementation date of the proposed rule
change in a Regulatory Notice to be published no later than 90 days
following Commission approval. The implementation date will be no later
than 180 days following Commission approval.
III. Discussion and Findings
After a careful review of the proposal, the Commission finds that
the proposed rule change is consistent with the requirements of the
Exchange Act and the rules and regulations thereunder applicable to
FINRA.\9\ In particular, the Commission finds that the proposed rule
change is consistent with Section
[[Page 8774]]
15A(b)(6) of the Exchange Act,\10\ which requires, among other things,
that FINRA's rules be designed to prevent fraud and manipulative
practices and to promote just and equitable principles of trade and, in
general, to protect investors and the public interest. The Commission
believes that the proposed rule change is reasonably designed to
achieve these ends by providing FINRA member broker-dealers the
opportunity to evaluate the appropriateness of certain lending
arrangements between their registered persons and others, to the extent
permitted by a FINRA member broker-dealer, and the potential that these
lending arrangements could create certain conflicts of interest.
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\9\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\10\ 15 U.S.C. 78o-3(b)(6).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\11\ that the proposed rule change (SR-FINRA-2009-095) be,
and hereby is, approved.
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\11\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-3775 Filed 2-24-10; 8:45 am]
BILLING CODE 8011-01-P
