Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt FINRA Rule 3160 (Networking Arrangements Between Members and Financial Institutions) in the Consolidated FINRA Rulebook, 13632-13636 [2010-6214]
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13632
Federal Register / Vol. 75, No. 54 / Monday, March 22, 2010 / Notices
the Commission believes that this
change will eliminate unnecessary
duplicate disclosures, while continuing
to provide investors with sufficient
notice of such material information.
Finally, Nasdaq proposes to eliminate
the requirements in Rule 5810(b) and
5840(k) that companies must notify
multiple Nasdaq departments before
issuing certain disclosures. The
Commission is satisfied that Nasdaq’s
proposed changes will continue to
provide for adequate notification to the
MarketWatch Department, as well as
other departments,25 since Nasdaq has
represented that the MarketWatch
Department will notify other Nasdaq
departments of the disclosures when
necessary.26 As such, the Commission
believes that Nasdaq’s notification
procedures will be streamlined,
eliminating unnecessary duplicative
notification requirements for listed
companies, while still ensuring that the
necessary departments will be notified
by the MarketWatch Department if
necessary for regulatory or other
reasons.
For the reasons noted above, the
Commission believes that the proposed
rule change is consistent with Section
6(b)(5) of the Act,27 and will, among
other things, protect investors and the
public interest by assuring that the
investing public has broad and easy
access to full disclosure of corporate
matters. As discussed above, the
Commission believes that the changes
proposed by Nasdaq will continue to
require issuers to disseminate necessary
information to the public in a broad and
inclusive manner, while at the same
time minimizing duplicative
disclosures.
IV. Conclusion
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It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,28 that the
proposed rule change (SR–NASDAQ–
2010–006) be, and it hereby is,
approved.
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[FR Doc. 2010–6182 Filed 3–19–10; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–61706; File No. SR–FINRA–
2009–047]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 1, To Adopt FINRA
Rule 3160 (Networking Arrangements
Between Members and Financial
Institutions) in the Consolidated FINRA
Rulebook
March 15, 2010.
I. Introduction
On July 21, 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 (‘‘Exchange Act’’
or ‘‘Act’’) 1 and Rule 19b–4 thereunder,2
a proposed rule change to adopt NASD
Rule 2350 (Broker/Dealer Conduct on
the Premises of Financial Institutions)
as FINRA Rule 3160 in the consolidated
FINRA rulebook, subject to certain
amendments.
The proposed rule change was
published for comment in the Federal
Register on August 11, 2009.3 The
Commission received five comments on
the proposed rule change.4 On February
29 17
requirement for a foreign private issuer to enter into
a listing agreement because there is no need to
single out this requirement from all the others of the
requirements of the Rule 5000 Series to which a
foreign private issuer is subject.
25 Companies are already required to use the
electronic disclosure submission service to notify
MarketWatch prior to the distribution of material
news. See Rule 5250(b)(1) and IM–5250–1. See also
Securities Exchange Act Release No. 55856 (June 4,
2007), 72 FR 32383 (June 12, 2007) (approving SR–
NASDAQ–2007–029).
26 Nasdaq is also proposing: (i) To add a title to
Rule 5250(b)(1) to clarify the text; and (ii) to use
capitalization for a defined term in Rule 5615.
These are non-substantive changes.
27 15 U.S.C. 78f(b)(5).
28 15 U.S.C. 78s(b)(2).
VerDate Nov<24>2008
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.29
Florence E. Harmon,
Deputy Secretary.
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. 60475
(August 11, 2009), 74 FR 41774 (August 18, 2009).
4 See letter from Frederick T. Greene, Woodforest
Financial Services, Inc., to Elizabeth M. Murphy,
Secretary, Commission, dated September 4, 2009
(‘‘Woodforest Letter’’); letter from William A.
Jacobson and Eric D. Johnson, Cornell Securities
Law Clinic, to Elizabeth M. Murphy, Secretary,
Commission, dated September 8, 2009 (‘‘Cornell
Letter’’); letter from Dale E. Brown, Financial
Services Institute, Inc., to Elizabeth M. Murphy,
Secretary, Commission, dated September 8, 2009
(‘‘FSI Letter’’); letter from Jill I. Gross and Ed
Pekarek, Pace University School of Law Investor
Rights Clinic, operating through John Jay Legal
Services, Inc., to Elizabeth M. Murphy, Secretary,
Commission, dated September 8, 2009 (‘‘PIRC
Letter’’); letter from Ronald C. Long, Wells Fargo
Advisors, to Elizabeth M. Murphy, Secretary,
Commission, dated September 18, 2009 (‘‘WFA
Letter’’).
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5, 2010, FINRA responded to the
comments.5 Also on February 5, 2010,
FINRA filed Amendment No. 1 to the
proposed rule change.6 The Commission
is publishing this notice and order to
solicit comments on Amendment No. 1
and to approve the proposed rule
change, as modified by Amendment No.
1, on an accelerated basis.
II. Description of Proposed Rule Change
As part of the process of developing
a new consolidated rulebook
(‘‘Consolidated FINRA Rulebook’’),7
FINRA proposed to adopt NASD Rule
2350 (Broker/Dealer Conduct on the
Premises of Financial Institutions),
subject to certain amendments, as
FINRA Rule 3160 (Networking
Arrangements Between Members and
Financial Institutions). The details of
the proposed rule change are described
below.
NASD Rule 2350
NASD Rule 2350 governs the
activities of broker-dealers on the
premises of financial institutions.8 Also
known as the ‘‘bank broker-dealer rule,’’
Rule 2350 generally requires brokerdealers that conduct business on the
premises of a financial institution where
retail deposits are taken to: (1) Enter
into a written agreement with the
financial institution specifying each
party’s responsibilities and the terms of
compensation (networking agreement);
(2) segregate the securities activities
conducted on the premises of the
financial institution from the retail
deposit-taking area; (3) allow access for
inspection and examination by the SEC
and FINRA; (4) ensure that
communications with customers clearly
identify that the broker-dealer services
are provided by the member; (5)
disclose to customers that the securities
5 See letter from Gary L. Goldsholle, FINRA, to
Elizabeth M. Murphy, Secretary, Commission, dated
February 5, 2010 (‘‘FINRA Response’’).
6 Amendment No. 1 made minor edits to the rule
text and the description of the proposal.
7 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).
8 Under the rule, the term ‘‘financial institution’’
includes federal and state-chartered banks, savings
and loan associations, savings banks, credit unions,
and the service corporations of such institutions
required by law.
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products offered by the broker-dealer
are not insured like other banking
products; and (6) make reasonable
efforts at account opening to obtain a
customer’s written acknowledgement of
the receipt of such disclosure. Rule 2350
applies only when broker-dealer
services are conducted either in person,
over the telephone, or through any other
electronic medium, on the premises of
a financial institution where retail
deposits are taken, by a broker-dealer
that has a physical presence on those
premises.9
NASD Rule 2350 was adopted to
reduce potential customer confusion in
dealing with broker-dealers that conduct
business on the premises of financial
institutions, and to clarify the
relationship between a broker-dealer
and a financial institution entering into
a networking agreement.10
The Gramm-Leach Bliley Act and
Regulation R
In 2007, the SEC and the Board of
Governors of the Federal Reserve jointly
adopted rules, known as Regulation R,11
that implement the bank broker
provisions of the Gramm-Leach Bliley
Act of 1999 (‘‘GLB’’).12 These provisions
replaced what had been a blanket
exception for banks from the definition
of ‘‘broker’’ under the Exchange Act with
eleven exceptions from the definition of
‘‘broker’’ that are codified in Exchange
Act Section 3(a)(4)(B).13
Exchange Act Section 3(a)(4)(B)(i)
provides an exception from the
definition of ‘‘broker’’ for banks that
enter into third-party brokerage (or
networking) arrangements with a
broker-dealer (the networking
exception). Under this exception, a bank
is not considered to be a broker if it
enters into a contractual or other written
arrangement with a registered brokerdealer under which the broker-dealer
offers brokerage services on or off bank
premises, subject to certain conditions
(this differs from NASD Rule 2350,
which only applies to broker-dealers
offering brokerage services on a
financial institution’s premises).14
Although this exception generally
provides that a bank may not pay its
unregistered employees incentive
compensation for referring a customer to
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9 See
Notice to Members 97–89 (December 1997).
10 See Securities Exchange Act Release No. 39294
(November 4, 1997), 62 FR 60542, 60547 (November
10, 1997) (Approval Order).
11 See 17 CFR 247.700–781.
12 Pub. L. 106–102, 113 Stat. 1338 (1999).
13 See 15 U.S.C. 78c(a)(4).
14 The exceptions in Section 3(a)(4)(B) of the
Exchange Act apply to ‘‘banks’’ as defined in
Exchange Act Section 3(a)(6). NASD Rule 2350
addresses ‘‘financial institutions.’’ See supra note 8.
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16:41 Mar 19, 2010
Jkt 220001
a broker-dealer, it does permit a bank
employee to receive a ‘‘nominal onetime cash fee of a fixed dollar amount’’
that is not contingent on whether the
referral results in a transaction with the
broker-dealer.15 Further, Rule 701 of
Regulation R provides an exemption for
referrals of certain institutional and high
net worth clients that may result in the
payment of a higher referral fee (i.e.,
incentive compensation of more than a
nominal amount) to bank employees
and may be contingent on the
occurrence of a securities transaction,
subject to certain additional
requirements.16
13633
conducting broker-dealer services on the
premises of a financial institution: (1)
Be clearly identified as the person
performing broker-dealer services and
distinguish its broker-dealer services
from the services of the financial
institution; (2) conduct its broker-dealer
services in an area that displays clearly
the member’s name; and (3) to the
extent practicable, maintain its brokerdealer services in a location physically
separate from the routine retail deposittaking activities of the financial
institution.
Third, the proposed rule change
would amend the provisions addressing
networking agreements, in NASD Rule
2350(c)(2) (Networking and Brokerage
Affiliate Agreements), to reference
certain requirements in GLB and
Regulation R regarding written
agreements between banks and brokerdealers. As noted above, Rule 701 of
Regulation R allows a bank employee to
receive a contingent referral fee not
subject to the ‘‘nominal amount’’
restriction, so long as the client referred
to the broker-dealer by the bank
employee is an ‘‘institutional’’ or ‘‘high
net worth’’ customer, as defined in Rule
701, and the other conditions of the rule
are satisfied.
Rule 701 requires that the written
agreement between a bank relying on
the exception from the definition of
‘‘broker’’ under Exchange Act Section
(3)(a)(4)(B)(i) and the exemption under
Rule 701 for institutional and high net
worth customers and its networking
broker-dealer include terms that obligate
the broker-dealer to take certain
actions.19 In particular, the written
agreement between the bank and brokerdealer must require that the brokerdealer:
Proposed FINRA Rule 3160
FINRA proposed to adopt NASD Rule
2350 into the Consolidated FINRA
Rulebook as FINRA Rule 3160, subject
to certain amendments to streamline the
rule and to reflect applicable provisions
of GLB and Regulation R.
First, the proposed rule change would
amend the scope of the rule to conform
to the networking exception in GLB.
NASD Rule 2350 applies only to brokerdealer conduct on the premises of a
financial institution where retail
deposits are taken. However, the
networking exception in GLB applies to
networking arrangements in which a
broker or dealer offers brokerage
services on or off the premises of a
bank.17 Accordingly, with the exception
of those requirements addressing the
physical setting, proposed FINRA Rule
3160 would apply to a member that is
a party to a networking arrangement
with a financial institution under which
the member offers broker-dealer
services, regardless of whether the
member is conducting broker-dealer
services on or off the premises of a
financial institution.18
Second, the proposed rule change
would make certain minor changes to
the provisions addressing setting, as set
forth in NASD Rule 2350(c)(1) (Setting).
The setting provision establishes the
requirements regarding a member’s
presence on the premises of a financial
institution. To better align the rule text
with the language in the networking
exception in GLB and its associated
rules in Regulation R, proposed FINRA
Rule 3160 would provide that a member
(1) Determine that a bank employee is not
subject to a statutory disqualification under
Section 3(a)(39) of the Exchange Act, have a
reasonable basis to believe that the customer
is a ‘‘high net worth customer’’ or an
‘‘institutional customer’’ and conduct a
suitability or sophistication analysis for
customers and securities transactions by
customers; 20
(2) promptly inform the bank if the brokerdealer determines that the customer referred
to the broker-dealer is not a ‘‘high net worth
customer’’ or an ‘‘institutional customer,’’ as
applicable, or the bank employee receiving
15 See 17 CFR 247.700 for definitions of the terms
‘‘nominal one-time cash fee of a fixed dollar
amount,’’ ‘‘referral,’’ ‘‘contingent on whether the
referral results in a transaction’’ and ‘‘incentive
compensation.’’
16 See 17 CFR 247.701.
17 See 15 U.S.C. 78c(a)(4)(B)(i).
18 The title of the rule would be changed from
‘‘Broker/Dealer Conduct on the Premises of
Financial Institutions’’ to ‘‘Networking
Arrangements Between Members and Financial
Institutions.’’
19 See 17 CFR 247.701(a)(3). See also Securities
Exchange Act Release No. 56501, 72 FR 56514,
56523 (October 3, 2007) (Definitions of Terms and
Exemptions Relating to the ‘‘Broker’’ Exceptions for
Banks) (‘‘Banks and broker-dealers are expected to
comply with the terms of their written networking
arrangements. If a bank or broker-dealer does not
comply with the terms of the agreement, however,
the bank would not become a ‘broker’ under Section
3(a)(4) of the Exchange Act or lose its ability to
operate under the proposed exemption.’’).
20 See 17 CFR 247.701(a)(3)(ii)–(iii).
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Federal Register / Vol. 75, No. 54 / Monday, March 22, 2010 / Notices
the referral fee is subject to a statutory
disqualification under Section 3(a)(39) of the
Exchange Act; 21 and
(3) inform the customer if the customer or
the securities transaction(s) to be conducted
by the customer does not meet the applicable
standard set forth in the suitability or
sophistication determination in Rule 701; 22
In addition, the broker-dealer may be
contractually obligated to provide
certain disclosures to a referred
customer.23
Proposed FINRA Rule 3160 would
clarify that networking agreements must
include all broker-dealer obligations, as
applicable, in Rule 701, and that
independent of their contractual
obligations, members must comply with
all such broker-dealer obligations. In
this regard, the release adopting
Regulation R specifically contemplated
that FINRA might adopt a rule to require
that broker-dealers comply with the
requirements of Rule 701.24
Next, the proposed rule change would
modify the provisions addressing
customer disclosure and
acknowledgements, in NASD Rule
2350(c)(3) (Customer Disclosure and
Written Acknowledgement), which
require members to make certain
disclosures to customers regarding
securities products, at or prior to
account opening, and to make
reasonable efforts to obtain a customer’s
written acknowledgement of the receipt
of such disclosures at account opening.
Such disclosures include that the
securities products are: (1) Not insured
by the Federal Deposit Insurance
Corporation (‘‘FDIC’’); (2) not deposits or
other obligations of the financial
institution and not guaranteed by the
financial institution; and (3) subject to
investment risk, including possible loss
of the principal invested.
The proposal would not incorporate
the written acknowledgement
requirement into proposed FINRA Rule
3160, in light of the application of the
rule to networking arrangements
regardless of whether the member is
21 See
17 CFR 247.701(a)(3)(v).
17 CFR 247.701(a)(3)(iv). See Securities
Exchange Act Release No. 56501 (October 3, 2007)
(re: Suitability or Sophistication Analysis by
Broker-Dealer). The ‘‘sophistication’’ analysis is
based on the elements of NASD IM–2310–3
(Suitability Obligations to Institutional Customers).
FINRA is seeking comment on a proposal regarding
a consolidated FINRA rule addressing suitability
obligations. See Regulatory Notice 09–25 (May
2009).
23 See 17 CFR 247.701(b).
24 See Securities Exchange Act Release No. 56501,
72 FR 56514, 56528 n.135 (October 3, 2007) (‘‘As
stated in the proposal, the Commission anticipates
that it may be necessary for either FINRA or the
Commission to propose a rule that would require
broker-dealers to comply with the written
agreements entered into pursuant to Rule 701.’’).
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22 See
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16:41 Mar 19, 2010
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conducting broker-dealer services on or
off the premises of a financial
institution and the obligation that
members provide the requisite
disclosures orally and in writing. In this
context, FINRA believes that oral and
written disclosure to customers
regarding securities products is
sufficient and that requiring a written
acknowledgement of receipt from
customers is unnecessary.
Lastly, the proposed rule change
would amend the provisions addressing
communications with the public in
NASD Rule 2350(c)(4) (Communications
with the Public), consistent with the
extension of proposed FINRA Rule 3160
to networking arrangements where the
member conducts broker-dealer services
on or off the premises of a financial
institution. NASD Rule 2350(c)(4)
requires a member to make the same
disclosures regarding securities
products discussed above on
advertisements and sales literature that
announce the location of a financial
institution where broker-dealer services
are provided by the member or that are
distributed by the member on the
premises of a financial institution. To
further reduce potential customer
confusion, proposed FINRA Rule 3160
would extend this requirement to
include all of the member’s
advertisements and sales literature that
promote the name or services of the
financial institution or that are
distributed by the member at any other
location where the financial institution
is present or represented.
III. Summary of Comments and
Amendment No. 1
The Commission received five
comments in response to the rule
proposal. Four of the commenters
generally supported the proposed rule
change,25 and one opposed it, stating
that the proposal did not go far enough
to distinguish between banking and
investment activities.26 The comments
also raised specific issues, discussed
below.
Networking Arrangements on and off
the Premises of Financial Institutions
One commenter 27stated that the
application of proposed FINRA Rule
3160 to broker-dealer services off the
premises of a financial institution
would unreasonably expand the
requirements of NASD Rule 2350 to
provide certain disclosures orally and in
writing to customers beyond bank
25 See Cornell Letter, FSI Letter, WFA Letter and
Woodforest Letter.
26 See PIRC Letter.
27 See WFA Letter.
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brokerage clients to include all other
customers of the broker-dealer,
including institutional clients, on-line
brokerage clients and off-shore clients.
In its response, FINRA stated that it
believes that extending proposed FINRA
Rule 3160 to apply to member conduct
pursuant to a networking arrangement,
regardless of where such activities take
place, will enhance investor protection.
However, in light of comments received
regarding the application of the
proposed rule to customer accounts that
are not opened as a result of a member’s
networking arrangement with a
financial institution, FINRA amended
the proposal to require that oral
disclosures only be provided at or prior
to the time that a customer account is
opened on the premises of a financial
institution by a member that is a party
to a networking arrangement with the
financial institution. Written disclosures
that the broker-dealer services are being
provided by the member and not by the
financial institution, and that the
securities products purchased or sold in
a transaction with the member are not
insured by the FDIC, not obligations of
or guaranteed by the financial
institution, and are subject to
investment risks, including possible loss
of principal, would still be required as
set forth in the original proposal. FINRA
notes that a written acknowledgement is
not required under GLB or Regulation R.
FINRA believes that this change will
retain the benefits of applying the rule
to member conduct on or off the
premises of a financial institution
without imposing potentially
unnecessary oral disclosures to
customers whose account openings may
be wholly unrelated to the networking
arrangement.28
One commenter 29 suggested that if a
member’s networking agreement with a
financial institution does not explicitly
address off premises brokerage services
to be provided by the member, then the
member should not have to comply with
the proposed rule in its application to
off premises activities. In its response,
FINRA disagreed with this
interpretation of the proposed rule.
Proposed FINRA Rule 3160 would
apply to a member conducting brokerdealer services under a networking
arrangement off the premises of a
financial institution, regardless of the
specific contractual agreements between
the parties. FINRA stated that the
proposed rule is intended to impose
certain requirements on members in
networking arrangements that apply
28 See
29 See
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FINRA Response.
WFA Letter.
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notwithstanding any contractual
obligations of the parties.
One commenter 30 opposed proposed
FINRA Rule 3160 stating that it appears
designed to maintain the status quo. The
commenter stated that the proposed rule
is insufficient and does not adequately
protect investors, and specifically noted
that senior citizens are often confused
regarding the role of financial
institutions with respect to securities
activities through networking
arrangements. In its response, FINRA
stated that it does not believe that the
proposed rule maintains the status quo,
and noted that the proposed rule change
expands existing requirements to
encompass activities of a broker-dealer
operating under a networking agreement
with a financial institution occurring off
the premises of a financial institution.
Moreover, FINRA stated that its
examination and enforcement
mechanisms will continue to bolster the
application of FINRA’s requirements
governing members’ networking
arrangements with financial
institutions.31
Written Acknowledgement of Receipt of
Disclosures
Certain commenters 32 suggested that
FINRA maintain in proposed FINRA
Rule 3160 a requirement that a member
make a reasonable effort to obtain from
each customer during the account
opening process a written
acknowledgement of receipt of the
disclosures required under the rule. One
commenter 33 noted that, if this
requirement was eliminated, members
would have less incentive to ensure that
associated persons are making the
required disclosures. Another
commenter 34 viewed FINRA’s reasons
for removing the acknowledgement
requirement as unpersuasive. This
commenter suggested that members
have the technology to obtain adequate
written acknowledgement from
customers, and any administrative
burden imposed upon members by a
written acknowledgment requirement
would be greatly outweighed by the
benefit of reducing customer confusion.
One commenter 35 asserted that
notwithstanding the current
requirement to obtain written
acknowledgment from customers, many
investors do not know that they are
acquiring a securities product as
opposed to a bank product.
30 See
PIRC Letter.
FINRA Response.
32 See Woodforest Letter, Cornell Letter and PIRC
Letter.
33 See PIRC Letter.
34 See Cornell Letter.
35 See PIRC Letter.
31 See
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16:41 Mar 19, 2010
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Additionally, one commenter 36 noted
that FINRA’s proposal may conflict with
the Interagency Statement on Retail
Sales of Nondeposit Investment
Products,37 which requires firms to
obtain written acknowledgement for the
receipt of nondepository product
disclosures. While the commenter did
not oppose FINRA’s proposal in this
respect, it views the proposal as an
opportunity for regulatory
harmonization in this area. In its
response, FINRA stated that it continues
to believe that retaining a written
acknowledgement in its rule is
unnecessary. Moreover, FINRA opined
that its proposal would not conflict with
a firm’s obligations under the
Interagency Statement, and a written
acknowledgement is not required under
GLB or Regulation R.
Setting Provision
One commenter 38 expressed the view
that it is common industry practice for
a registered representative to use
conference rooms at a bank location to
meet with customers because many
representatives’ ‘‘offices’’ are cubicles
within the operations area of the
financial institution. The commenter 39
suggested that FINRA eliminate
proposed FINRA Rule 3160(a)(1)(B),
which would require members to
conduct broker-dealer activities in an
area that clearly displays the member’s
name so that the use of shared
conference rooms may continue.
Another commenter 40 added that the
‘‘to the extent practicable’’ language in
the setting provision is problematic
because it invites a subjective and selfserving interpretation of this provision
by the financial institution and the
member. One commenter 41 read
proposed FINRA Rule 3160 as excluding
electronic broker-dealer activities and
noted that the setting provision ignores
that bank deposits are often done
electronically.
In its response, FINRA stated that it
does not believe that the proposed rule
prevents a registered person from using
a conference room at a financial
institution inasmuch as each of the
elements of paragraph (a)(1) of the
36 See
WFA Letter.
of Governors of the Federal Reserve
System, Office of the Comptroller of the Currency,
Federal Deposit Insurance Corporation, Office of
Thrift Supervision, ‘‘Interagency Statement on
Retail Sale of Nondeposit Investment Products,’’
Feb. 15, 1994, as supplemented by Joint
Interpretations of the Interagency Statement on
Retail Sales of Nondeposit Investment Products,
Sept. 12, 1995 (the ‘‘Interagency Statement’’).
38 See Woodforest Letter.
39 See id.
40 See PIRC Letter.
41 See id.
37 Board
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13635
proposed rule, including the signage
requirement in subparagraph (B), can be
satisfied. FINRA also noted that the
language ‘‘to the extent practicable’’
exists in current NASD Rule 2350 and
was not amended under the proposal.
Additionally, GLB includes identical
language in a corresponding
provision.42 Finally, although the
provisions of proposed FINRA Rule
3160(a)(1) provide specific guidance for
physical separation on the premises of
a financial institution, other provisions
in the proposed rule (i.e., paragraphs
(a)(3) and (a)(4)) address potential
customer confusion for electronic or
otherwise off-premises broker-dealer
conduct. With respect to electronic
deposits made on the premises of a
financial institution, FINRA noted that
the ‘‘retail deposit-taking area’’ would
include areas that have ATMs where
electronic deposits are made.
Disclosures on Advertisements and
Sales Literature
One commenter 43 suggested
clarifying proposed FINRA Rule
3160(a)(4)(B), stating that the rule
appears to require financial institutions
to include disclosures on
advertisements that do not refer to the
broker-dealer or its services. In its
response, FINRA noted that proposed
FINRA Rule 3160 would apply to the
conduct and communications of a
FINRA member in a networking
arrangement, and not to the activities or
communications of a financial
institution that are unrelated to the
networking arrangement. As such,
FINRA declined to amend the proposal
in response to this comment.
Proposed FINRA Rule 3160(a)(4)(C)
would provide a list of certain
advertisements and sales literature that
do not have to include the disclosures
required under the proposed rule. One
commenter 44 recommended adding
business cards of a registered
representative that are printed on a
standard size 2″ x 3″ card to this list,
stating that it would be difficult to fit
the disclosures on such
communications. In its response, FINRA
stated that it does not intend to amend
proposed FINRA Rule 3160(a)(4)(C) to
exclude business cards from the
required disclosures. FINRA explained
that, to the extent business cards are
sales literature, disclosures should be
provided to assist customers in
recognizing the distinctions between the
brokerage services offered by the
member and the banking services
42 See
Exchange Act Section 3(a)(4)(B)(i)(II).
FSI Letter.
44 See Woodforest Letter.
43 See
E:\FR\FM\22MRN1.SGM
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Federal Register / Vol. 75, No. 54 / Monday, March 22, 2010 / Notices
offered by the financial institution.45
FINRA also noted that, where necessary,
members may use the short form legend
as provided in proposed FINRA Rule
3160(a)(4)(B) on business cards.
IV. Discussion and Finding
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 applicable to a national
securities association.46 The
Commission believes that the proposed
rule change, as amended, is consistent
with the provisions of Section 15A(b)(6)
of the Act, 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.47 In
particular, the proposed rule change, as
amended, will clarify and streamline the
FINRA requirements for broker-dealer
networking arrangements and better
align FINRA requirements with GLB
and Regulation R. This, in turn, should
promote member firm’s compliance
efforts.
V. Accelerated Approval
The Commission finds good cause,
pursuant to Section 19(b)(2) of the
Act,48 for approving the proposed rule
change, as amended by Amendment No.
1 thereto, prior to the 30th day after the
date of publication in the Federal
Register. The changes proposed in
Amendment No. 1 are minor, and do not
raise novel regulatory concerns.
Moreover, accelerating approval of this
proposal should benefit FINRA member
firms and investors by more closing
aligning, without undue delay, FINRA
requirements with both GLB and
Regulation R.
VI. Solicitation of Comments
pwalker on DSK8KYBLC1PROD with NOTICES
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
45 See FINRA Interpretive Letter to Tamara K.
Salmon, Investment Company Institute (September
6, 2007).
46 In approving the proposed rule change, the
Commission has considered the rule change’s
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
47 See 15 U.S.C. 78o–3(b)(6).
48 15 U.S.C. 78o-3(b)(5).
VerDate Nov<24>2008
16:41 Mar 19, 2010
Jkt 220001
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–FINRA–2009–047 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–FINRA–2009–047. 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 (https://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 FINRA. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–FINRA–2009–047 and
should be submitted on or before April
12, 2010.
VII. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,49 that the
proposed rule change (SR–FINRA–
2009–047), as amended, be, and hereby
is, approved on an accelerated basis.
49 15
PO 00000
U.S.C. 78s(b)(2).
Frm 00154
Fmt 4703
Sfmt 4703
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.50
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–6214 Filed 3–19–10; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–61710; File No. SR–ISE–
2010–02]
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Order Approving Proposed Rule
Change To Amend Exchange Rules
Related to Cut-Off Time for Contrary
Exercise Advice Submissions
March 15, 2010.
I. Introduction
On January 11, 2010, the International
Securities Exchange, LLC (the
‘‘Exchange’’ or the ‘‘ISE’’) 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
relating to the cut-off time for
submitting contrary exercise advices to
the Exchange. The proposed rule change
was published for comment in the
Federal Register on February 8, 2010.3
This order approves the proposed rule
change.
II. Description of the Proposal
The Exchange has proposed to amend
Rule 1100 to extend the cut-off time to
submit contrary exercise advices
(‘‘CEAs’’) 4 to the Exchange to 7:30 p.m.
The Exchange also has proposed to
make certain non-substantive changes to
reorganize the text of Rule 1100 to more
clearly present the existing
requirements and to eliminate
duplicative language.
Pursuant to Rule 805 of the Options
Clearing Corporation (‘‘OCC’’), certain
options that are in-the-money by a
specified amount will be automatically
exercised. This procedure is known as
‘‘Exercise-by-Exception’’ or ‘‘Ex-by-Ex.’’
Under the Ex-by-Ex process, options
holders holding option contracts that
are in-the-money by a requisite amount
and who wish to have their contracts
automatically exercised need take no
50 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 61458
(February 1, 2010), 75 FR 6237.
4 Contrary exercise advices are also referred to as
Expiring Exercise Declarations in the OCC rules.
1 15
E:\FR\FM\22MRN1.SGM
22MRN1
]]>Agencies
[Federal Register Volume 75, Number 54 (Monday, March 22, 2010)]
[Notices]
[Pages 13632-13636]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-6214]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61706; File No. SR-FINRA-2009-047]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment No. 1, To Adopt FINRA Rule 3160 (Networking Arrangements
Between Members and Financial Institutions) in the Consolidated FINRA
Rulebook
March 15, 2010.
I. Introduction
On July 21, 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 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to adopt NASD Rule 2350 (Broker/
Dealer Conduct on the Premises of Financial Institutions) as FINRA Rule
3160 in the consolidated FINRA rulebook, subject to certain amendments.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
The proposed rule change was published for comment in the Federal
Register on August 11, 2009.\3\ The Commission received five comments
on the proposed rule change.\4\ On February 5, 2010, FINRA responded to
the comments.\5\ Also on February 5, 2010, FINRA filed Amendment No. 1
to the proposed rule change.\6\ The Commission is publishing this
notice and order to solicit comments on Amendment No. 1 and to approve
the proposed rule change, as modified by Amendment No. 1, on an
accelerated basis.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 60475 (August 11,
2009), 74 FR 41774 (August 18, 2009).
\4\ See letter from Frederick T. Greene, Woodforest Financial
Services, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated
September 4, 2009 (``Woodforest Letter''); letter from William A.
Jacobson and Eric D. Johnson, Cornell Securities Law Clinic, to
Elizabeth M. Murphy, Secretary, Commission, dated September 8, 2009
(``Cornell Letter''); letter from Dale E. Brown, Financial Services
Institute, Inc., to Elizabeth M. Murphy, Secretary, Commission,
dated September 8, 2009 (``FSI Letter''); letter from Jill I. Gross
and Ed Pekarek, Pace University School of Law Investor Rights
Clinic, operating through John Jay Legal Services, Inc., to
Elizabeth M. Murphy, Secretary, Commission, dated September 8, 2009
(``PIRC Letter''); letter from Ronald C. Long, Wells Fargo Advisors,
to Elizabeth M. Murphy, Secretary, Commission, dated September 18,
2009 (``WFA Letter'').
\5\ See letter from Gary L. Goldsholle, FINRA, to Elizabeth M.
Murphy, Secretary, Commission, dated February 5, 2010 (``FINRA
Response'').
\6\ Amendment No. 1 made minor edits to the rule text and the
description of the proposal.
---------------------------------------------------------------------------
II. Description of Proposed Rule Change
As part of the process of developing a new consolidated rulebook
(``Consolidated FINRA Rulebook''),\7\ FINRA proposed to adopt NASD Rule
2350 (Broker/Dealer Conduct on the Premises of Financial Institutions),
subject to certain amendments, as FINRA Rule 3160 (Networking
Arrangements Between Members and Financial Institutions). The details
of the proposed rule change are described below.
---------------------------------------------------------------------------
\7\ 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).
---------------------------------------------------------------------------
NASD Rule 2350
NASD Rule 2350 governs the activities of broker-dealers on the
premises of financial institutions.\8\ Also known as the ``bank broker-
dealer rule,'' Rule 2350 generally requires broker-dealers that conduct
business on the premises of a financial institution where retail
deposits are taken to: (1) Enter into a written agreement with the
financial institution specifying each party's responsibilities and the
terms of compensation (networking agreement); (2) segregate the
securities activities conducted on the premises of the financial
institution from the retail deposit-taking area; (3) allow access for
inspection and examination by the SEC and FINRA; (4) ensure that
communications with customers clearly identify that the broker-dealer
services are provided by the member; (5) disclose to customers that the
securities
[[Page 13633]]
products offered by the broker-dealer are not insured like other
banking products; and (6) make reasonable efforts at account opening to
obtain a customer's written acknowledgement of the receipt of such
disclosure. Rule 2350 applies only when broker-dealer services are
conducted either in person, over the telephone, or through any other
electronic medium, on the premises of a financial institution where
retail deposits are taken, by a broker-dealer that has a physical
presence on those premises.\9\
---------------------------------------------------------------------------
\8\ Under the rule, the term ``financial institution'' includes
federal and state-chartered banks, savings and loan associations,
savings banks, credit unions, and the service corporations of such
institutions required by law.
\9\ See Notice to Members 97-89 (December 1997).
---------------------------------------------------------------------------
NASD Rule 2350 was adopted to reduce potential customer confusion
in dealing with broker-dealers that conduct business on the premises of
financial institutions, and to clarify the relationship between a
broker-dealer and a financial institution entering into a networking
agreement.\10\
---------------------------------------------------------------------------
\10\ See Securities Exchange Act Release No. 39294 (November 4,
1997), 62 FR 60542, 60547 (November 10, 1997) (Approval Order).
---------------------------------------------------------------------------
The Gramm-Leach Bliley Act and Regulation R
In 2007, the SEC and the Board of Governors of the Federal Reserve
jointly adopted rules, known as Regulation R,\11\ that implement the
bank broker provisions of the Gramm-Leach Bliley Act of 1999
(``GLB'').\12\ These provisions replaced what had been a blanket
exception for banks from the definition of ``broker'' under the
Exchange Act with eleven exceptions from the definition of ``broker''
that are codified in Exchange Act Section 3(a)(4)(B).\13\
---------------------------------------------------------------------------
\11\ See 17 CFR 247.700-781.
\12\ Pub. L. 106-102, 113 Stat. 1338 (1999).
\13\ See 15 U.S.C. 78c(a)(4).
---------------------------------------------------------------------------
Exchange Act Section 3(a)(4)(B)(i) provides an exception from the
definition of ``broker'' for banks that enter into third-party
brokerage (or networking) arrangements with a broker-dealer (the
networking exception). Under this exception, a bank is not considered
to be a broker if it enters into a contractual or other written
arrangement with a registered broker-dealer under which the broker-
dealer offers brokerage services on or off bank premises, subject to
certain conditions (this differs from NASD Rule 2350, which only
applies to broker-dealers offering brokerage services on a financial
institution's premises).\14\ Although this exception generally provides
that a bank may not pay its unregistered employees incentive
compensation for referring a customer to a broker-dealer, it does
permit a bank employee to receive a ``nominal one-time cash fee of a
fixed dollar amount'' that is not contingent on whether the referral
results in a transaction with the broker-dealer.\15\ Further, Rule 701
of Regulation R provides an exemption for referrals of certain
institutional and high net worth clients that may result in the payment
of a higher referral fee (i.e., incentive compensation of more than a
nominal amount) to bank employees and may be contingent on the
occurrence of a securities transaction, subject to certain additional
requirements.\16\
---------------------------------------------------------------------------
\14\ The exceptions in Section 3(a)(4)(B) of the Exchange Act
apply to ``banks'' as defined in Exchange Act Section 3(a)(6). NASD
Rule 2350 addresses ``financial institutions.'' See supra note 8.
\15\ See 17 CFR 247.700 for definitions of the terms ``nominal
one-time cash fee of a fixed dollar amount,'' ``referral,''
``contingent on whether the referral results in a transaction'' and
``incentive compensation.''
\16\ See 17 CFR 247.701.
---------------------------------------------------------------------------
Proposed FINRA Rule 3160
FINRA proposed to adopt NASD Rule 2350 into the Consolidated FINRA
Rulebook as FINRA Rule 3160, subject to certain amendments to
streamline the rule and to reflect applicable provisions of GLB and
Regulation R.
First, the proposed rule change would amend the scope of the rule
to conform to the networking exception in GLB. NASD Rule 2350 applies
only to broker-dealer conduct on the premises of a financial
institution where retail deposits are taken. However, the networking
exception in GLB applies to networking arrangements in which a broker
or dealer offers brokerage services on or off the premises of a
bank.\17\ Accordingly, with the exception of those requirements
addressing the physical setting, proposed FINRA Rule 3160 would apply
to a member that is a party to a networking arrangement with a
financial institution under which the member offers broker-dealer
services, regardless of whether the member is conducting broker-dealer
services on or off the premises of a financial institution.\18\
---------------------------------------------------------------------------
\17\ See 15 U.S.C. 78c(a)(4)(B)(i).
\18\ The title of the rule would be changed from ``Broker/Dealer
Conduct on the Premises of Financial Institutions'' to ``Networking
Arrangements Between Members and Financial Institutions.''
---------------------------------------------------------------------------
Second, the proposed rule change would make certain minor changes
to the provisions addressing setting, as set forth in NASD Rule
2350(c)(1) (Setting). The setting provision establishes the
requirements regarding a member's presence on the premises of a
financial institution. To better align the rule text with the language
in the networking exception in GLB and its associated rules in
Regulation R, proposed FINRA Rule 3160 would provide that a member
conducting broker-dealer services on the premises of a financial
institution: (1) Be clearly identified as the person performing broker-
dealer services and distinguish its broker-dealer services from the
services of the financial institution; (2) conduct its broker-dealer
services in an area that displays clearly the member's name; and (3) to
the extent practicable, maintain its broker-dealer services in a
location physically separate from the routine retail deposit-taking
activities of the financial institution.
Third, the proposed rule change would amend the provisions
addressing networking agreements, in NASD Rule 2350(c)(2) (Networking
and Brokerage Affiliate Agreements), to reference certain requirements
in GLB and Regulation R regarding written agreements between banks and
broker-dealers. As noted above, Rule 701 of Regulation R allows a bank
employee to receive a contingent referral fee not subject to the
``nominal amount'' restriction, so long as the client referred to the
broker-dealer by the bank employee is an ``institutional'' or ``high
net worth'' customer, as defined in Rule 701, and the other conditions
of the rule are satisfied.
Rule 701 requires that the written agreement between a bank relying
on the exception from the definition of ``broker'' under Exchange Act
Section (3)(a)(4)(B)(i) and the exemption under Rule 701 for
institutional and high net worth customers and its networking broker-
dealer include terms that obligate the broker-dealer to take certain
actions.\19\ In particular, the written agreement between the bank and
broker-dealer must require that the broker-dealer:
---------------------------------------------------------------------------
\19\ See 17 CFR 247.701(a)(3). See also Securities Exchange Act
Release No. 56501, 72 FR 56514, 56523 (October 3, 2007) (Definitions
of Terms and Exemptions Relating to the ``Broker'' Exceptions for
Banks) (``Banks and broker-dealers are expected to comply with the
terms of their written networking arrangements. If a bank or broker-
dealer does not comply with the terms of the agreement, however, the
bank would not become a `broker' under Section 3(a)(4) of the
Exchange Act or lose its ability to operate under the proposed
exemption.'').
(1) Determine that a bank employee is not subject to a statutory
disqualification under Section 3(a)(39) of the Exchange Act, have a
reasonable basis to believe that the customer is a ``high net worth
customer'' or an ``institutional customer'' and conduct a
suitability or sophistication analysis for customers and securities
transactions by customers; \20\
---------------------------------------------------------------------------
\20\ See 17 CFR 247.701(a)(3)(ii)-(iii).
---------------------------------------------------------------------------
(2) promptly inform the bank if the broker-dealer determines
that the customer referred to the broker-dealer is not a ``high net
worth customer'' or an ``institutional customer,'' as applicable, or
the bank employee receiving
[[Page 13634]]
the referral fee is subject to a statutory disqualification under
Section 3(a)(39) of the Exchange Act; \21\ and
---------------------------------------------------------------------------
\21\ See 17 CFR 247.701(a)(3)(v).
---------------------------------------------------------------------------
(3) inform the customer if the customer or the securities
transaction(s) to be conducted by the customer does not meet the
applicable standard set forth in the suitability or sophistication
determination in Rule 701; \22\
---------------------------------------------------------------------------
\22\ See 17 CFR 247.701(a)(3)(iv). See Securities Exchange Act
Release No. 56501 (October 3, 2007) (re: Suitability or
Sophistication Analysis by Broker-Dealer). The ``sophistication''
analysis is based on the elements of NASD IM-2310-3 (Suitability
Obligations to Institutional Customers). FINRA is seeking comment on
a proposal regarding a consolidated FINRA rule addressing
suitability obligations. See Regulatory Notice 09-25 (May 2009).
In addition, the broker-dealer may be contractually obligated to
provide certain disclosures to a referred customer.\23\
---------------------------------------------------------------------------
\23\ See 17 CFR 247.701(b).
---------------------------------------------------------------------------
Proposed FINRA Rule 3160 would clarify that networking agreements
must include all broker-dealer obligations, as applicable, in Rule 701,
and that independent of their contractual obligations, members must
comply with all such broker-dealer obligations. In this regard, the
release adopting Regulation R specifically contemplated that FINRA
might adopt a rule to require that broker-dealers comply with the
requirements of Rule 701.\24\
---------------------------------------------------------------------------
\24\ See Securities Exchange Act Release No. 56501, 72 FR 56514,
56528 n.135 (October 3, 2007) (``As stated in the proposal, the
Commission anticipates that it may be necessary for either FINRA or
the Commission to propose a rule that would require broker-dealers
to comply with the written agreements entered into pursuant to Rule
701.'').
---------------------------------------------------------------------------
Next, the proposed rule change would modify the provisions
addressing customer disclosure and acknowledgements, in NASD Rule
2350(c)(3) (Customer Disclosure and Written Acknowledgement), which
require members to make certain disclosures to customers regarding
securities products, at or prior to account opening, and to make
reasonable efforts to obtain a customer's written acknowledgement of
the receipt of such disclosures at account opening. Such disclosures
include that the securities products are: (1) Not insured by the
Federal Deposit Insurance Corporation (``FDIC''); (2) not deposits or
other obligations of the financial institution and not guaranteed by
the financial institution; and (3) subject to investment risk,
including possible loss of the principal invested.
The proposal would not incorporate the written acknowledgement
requirement into proposed FINRA Rule 3160, in light of the application
of the rule to networking arrangements regardless of whether the member
is conducting broker-dealer services on or off the premises of a
financial institution and the obligation that members provide the
requisite disclosures orally and in writing. In this context, FINRA
believes that oral and written disclosure to customers regarding
securities products is sufficient and that requiring a written
acknowledgement of receipt from customers is unnecessary.
Lastly, the proposed rule change would amend the provisions
addressing communications with the public in NASD Rule 2350(c)(4)
(Communications with the Public), consistent with the extension of
proposed FINRA Rule 3160 to networking arrangements where the member
conducts broker-dealer services on or off the premises of a financial
institution. NASD Rule 2350(c)(4) requires a member to make the same
disclosures regarding securities products discussed above on
advertisements and sales literature that announce the location of a
financial institution where broker-dealer services are provided by the
member or that are distributed by the member on the premises of a
financial institution. To further reduce potential customer confusion,
proposed FINRA Rule 3160 would extend this requirement to include all
of the member's advertisements and sales literature that promote the
name or services of the financial institution or that are distributed
by the member at any other location where the financial institution is
present or represented.
III. Summary of Comments and Amendment No. 1
The Commission received five comments in response to the rule
proposal. Four of the commenters generally supported the proposed rule
change,\25\ and one opposed it, stating that the proposal did not go
far enough to distinguish between banking and investment
activities.\26\ The comments also raised specific issues, discussed
below.
---------------------------------------------------------------------------
\25\ See Cornell Letter, FSI Letter, WFA Letter and Woodforest
Letter.
\26\ See PIRC Letter.
---------------------------------------------------------------------------
Networking Arrangements on and off the Premises of Financial
Institutions
One commenter \27\stated that the application of proposed FINRA
Rule 3160 to broker-dealer services off the premises of a financial
institution would unreasonably expand the requirements of NASD Rule
2350 to provide certain disclosures orally and in writing to customers
beyond bank brokerage clients to include all other customers of the
broker-dealer, including institutional clients, on-line brokerage
clients and off-shore clients. In its response, FINRA stated that it
believes that extending proposed FINRA Rule 3160 to apply to member
conduct pursuant to a networking arrangement, regardless of where such
activities take place, will enhance investor protection. However, in
light of comments received regarding the application of the proposed
rule to customer accounts that are not opened as a result of a member's
networking arrangement with a financial institution, FINRA amended the
proposal to require that oral disclosures only be provided at or prior
to the time that a customer account is opened on the premises of a
financial institution by a member that is a party to a networking
arrangement with the financial institution. Written disclosures that
the broker-dealer services are being provided by the member and not by
the financial institution, and that the securities products purchased
or sold in a transaction with the member are not insured by the FDIC,
not obligations of or guaranteed by the financial institution, and are
subject to investment risks, including possible loss of principal,
would still be required as set forth in the original proposal. FINRA
notes that a written acknowledgement is not required under GLB or
Regulation R. FINRA believes that this change will retain the benefits
of applying the rule to member conduct on or off the premises of a
financial institution without imposing potentially unnecessary oral
disclosures to customers whose account openings may be wholly unrelated
to the networking arrangement.\28\
---------------------------------------------------------------------------
\27\ See WFA Letter.
\28\ See FINRA Response.
---------------------------------------------------------------------------
One commenter \29\ suggested that if a member's networking
agreement with a financial institution does not explicitly address off
premises brokerage services to be provided by the member, then the
member should not have to comply with the proposed rule in its
application to off premises activities. In its response, FINRA
disagreed with this interpretation of the proposed rule. Proposed FINRA
Rule 3160 would apply to a member conducting broker-dealer services
under a networking arrangement off the premises of a financial
institution, regardless of the specific contractual agreements between
the parties. FINRA stated that the proposed rule is intended to impose
certain requirements on members in networking arrangements that apply
[[Page 13635]]
notwithstanding any contractual obligations of the parties.
---------------------------------------------------------------------------
\29\ See WFA Letter.
---------------------------------------------------------------------------
One commenter \30\ opposed proposed FINRA Rule 3160 stating that it
appears designed to maintain the status quo. The commenter stated that
the proposed rule is insufficient and does not adequately protect
investors, and specifically noted that senior citizens are often
confused regarding the role of financial institutions with respect to
securities activities through networking arrangements. In its response,
FINRA stated that it does not believe that the proposed rule maintains
the status quo, and noted that the proposed rule change expands
existing requirements to encompass activities of a broker-dealer
operating under a networking agreement with a financial institution
occurring off the premises of a financial institution. Moreover, FINRA
stated that its examination and enforcement mechanisms will continue to
bolster the application of FINRA's requirements governing members'
networking arrangements with financial institutions.\31\
---------------------------------------------------------------------------
\30\ See PIRC Letter.
\31\ See FINRA Response.
---------------------------------------------------------------------------
Written Acknowledgement of Receipt of Disclosures
Certain commenters \32\ suggested that FINRA maintain in proposed
FINRA Rule 3160 a requirement that a member make a reasonable effort to
obtain from each customer during the account opening process a written
acknowledgement of receipt of the disclosures required under the rule.
One commenter \33\ noted that, if this requirement was eliminated,
members would have less incentive to ensure that associated persons are
making the required disclosures. Another commenter \34\ viewed FINRA's
reasons for removing the acknowledgement requirement as unpersuasive.
This commenter suggested that members have the technology to obtain
adequate written acknowledgement from customers, and any administrative
burden imposed upon members by a written acknowledgment requirement
would be greatly outweighed by the benefit of reducing customer
confusion. One commenter \35\ asserted that notwithstanding the current
requirement to obtain written acknowledgment from customers, many
investors do not know that they are acquiring a securities product as
opposed to a bank product. Additionally, one commenter \36\ noted that
FINRA's proposal may conflict with the Interagency Statement on Retail
Sales of Nondeposit Investment Products,\37\ which requires firms to
obtain written acknowledgement for the receipt of nondepository product
disclosures. While the commenter did not oppose FINRA's proposal in
this respect, it views the proposal as an opportunity for regulatory
harmonization in this area. In its response, FINRA stated that it
continues to believe that retaining a written acknowledgement in its
rule is unnecessary. Moreover, FINRA opined that its proposal would not
conflict with a firm's obligations under the Interagency Statement, and
a written acknowledgement is not required under GLB or Regulation R.
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\32\ See Woodforest Letter, Cornell Letter and PIRC Letter.
\33\ See PIRC Letter.
\34\ See Cornell Letter.
\35\ See PIRC Letter.
\36\ See WFA Letter.
\37\ Board of Governors of the Federal Reserve System, Office of
the Comptroller of the Currency, Federal Deposit Insurance
Corporation, Office of Thrift Supervision, ``Interagency Statement
on Retail Sale of Nondeposit Investment Products,'' Feb. 15, 1994,
as supplemented by Joint Interpretations of the Interagency
Statement on Retail Sales of Nondeposit Investment Products, Sept.
12, 1995 (the ``Interagency Statement'').
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Setting Provision
One commenter \38\ expressed the view that it is common industry
practice for a registered representative to use conference rooms at a
bank location to meet with customers because many representatives'
``offices'' are cubicles within the operations area of the financial
institution. The commenter \39\ suggested that FINRA eliminate proposed
FINRA Rule 3160(a)(1)(B), which would require members to conduct
broker-dealer activities in an area that clearly displays the member's
name so that the use of shared conference rooms may continue. Another
commenter \40\ added that the ``to the extent practicable'' language in
the setting provision is problematic because it invites a subjective
and self-serving interpretation of this provision by the financial
institution and the member. One commenter \41\ read proposed FINRA Rule
3160 as excluding electronic broker-dealer activities and noted that
the setting provision ignores that bank deposits are often done
electronically.
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\38\ See Woodforest Letter.
\39\ See id.
\40\ See PIRC Letter.
\41\ See id.
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In its response, FINRA stated that it does not believe that the
proposed rule prevents a registered person from using a conference room
at a financial institution inasmuch as each of the elements of
paragraph (a)(1) of the proposed rule, including the signage
requirement in subparagraph (B), can be satisfied. FINRA also noted
that the language ``to the extent practicable'' exists in current NASD
Rule 2350 and was not amended under the proposal. Additionally, GLB
includes identical language in a corresponding provision.\42\ Finally,
although the provisions of proposed FINRA Rule 3160(a)(1) provide
specific guidance for physical separation on the premises of a
financial institution, other provisions in the proposed rule (i.e.,
paragraphs (a)(3) and (a)(4)) address potential customer confusion for
electronic or otherwise off-premises broker-dealer conduct. With
respect to electronic deposits made on the premises of a financial
institution, FINRA noted that the ``retail deposit-taking area'' would
include areas that have ATMs where electronic deposits are made.
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\42\ See Exchange Act Section 3(a)(4)(B)(i)(II).
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Disclosures on Advertisements and Sales Literature
One commenter \43\ suggested clarifying proposed FINRA Rule
3160(a)(4)(B), stating that the rule appears to require financial
institutions to include disclosures on advertisements that do not refer
to the broker-dealer or its services. In its response, FINRA noted that
proposed FINRA Rule 3160 would apply to the conduct and communications
of a FINRA member in a networking arrangement, and not to the
activities or communications of a financial institution that are
unrelated to the networking arrangement. As such, FINRA declined to
amend the proposal in response to this comment.
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\43\ See FSI Letter.
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Proposed FINRA Rule 3160(a)(4)(C) would provide a list of certain
advertisements and sales literature that do not have to include the
disclosures required under the proposed rule. One commenter \44\
recommended adding business cards of a registered representative that
are printed on a standard size 2'' x 3'' card to this list, stating
that it would be difficult to fit the disclosures on such
communications. In its response, FINRA stated that it does not intend
to amend proposed FINRA Rule 3160(a)(4)(C) to exclude business cards
from the required disclosures. FINRA explained that, to the extent
business cards are sales literature, disclosures should be provided to
assist customers in recognizing the distinctions between the brokerage
services offered by the member and the banking services
[[Page 13636]]
offered by the financial institution.\45\ FINRA also noted that, where
necessary, members may use the short form legend as provided in
proposed FINRA Rule 3160(a)(4)(B) on business cards.
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\44\ See Woodforest Letter.
\45\ See FINRA Interpretive Letter to Tamara K. Salmon,
Investment Company Institute (September 6, 2007).
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IV. Discussion and Finding
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 applicable to a national securities
association.\46\ The Commission believes that the proposed rule change,
as amended, is consistent with the provisions of Section 15A(b)(6) of
the Act, 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.\47\ In particular, the
proposed rule change, as amended, will clarify and streamline the FINRA
requirements for broker-dealer networking arrangements and better align
FINRA requirements with GLB and Regulation R. This, in turn, should
promote member firm's compliance efforts.
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\46\ In approving the proposed rule change, the Commission has
considered the rule change's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
\47\ See 15 U.S.C. 78o-3(b)(6).
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V. Accelerated Approval
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\48\ for approving the proposed rule change, as amended by
Amendment No. 1 thereto, prior to the 30th day after the date of
publication in the Federal Register. The changes proposed in Amendment
No. 1 are minor, and do not raise novel regulatory concerns. Moreover,
accelerating approval of this proposal should benefit FINRA member
firms and investors by more closing aligning, without undue delay,
FINRA requirements with both GLB and Regulation R.
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\48\ 15 U.S.C. 78o-3(b)(5).
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VI. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-FINRA-2009-047 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2009-047. 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 (https://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 FINRA. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-FINRA-2009-047 and should be
submitted on or before April 12, 2010.
VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\49\ that the proposed rule change (SR-FINRA-2009-047), as amended,
be, and hereby is, approved on an accelerated basis.
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\49\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\50\
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\50\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-6214 Filed 3-19-10; 8:45 am]
BILLING CODE 8011-01-P
