Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving the Proposed Rule Change To Adopt FINRA Rule 5141 (Sale of Securities in a Fixed Price Offering) in the Consolidated FINRA Rulebook, 44033-44037 [2010-18301]
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Federal Register / Vol. 75, No. 143 / Tuesday, July 27, 2010 / Notices
Temporary Order
The Commission has considered the
matter and finds that Applicants have
made the necessary showing to justify
granting a temporary exemption.
Accordingly,
It is hereby ordered, pursuant to
section 9(c) of the Act, that Covered
Persons are granted a temporary
exemption from the provisions of
section 9(a), effective as of the date of
the Injunction, solely with respect to the
Injunction, subject to the condition in
the application, until the date the
Commission takes final action on an
application for a permanent order.
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[FR Doc. 2010–18313 Filed 7–26–10; 8:45 am]
BILLING CODE 8010–01–P
[Release No. 34–62539; File No. SR–FINRA–
2010–029]
SECURITIES AND EXCHANGE
COMMISSION
sroberts on DSKD5P82C1PROD with NOTICES
Sunshine Act Meetings
Notice is hereby given, pursuant to
the provisions of the Government in the
Sunshine Act, Public Law 94–409, that
the Securities and Exchange
Commission will hold Closed Meetings
on Wednesday, July 28, 2010 at 2:30
p.m. and on Thursday, July 29, 2010 at
2 p.m.
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the Closed Meetings. Certain
staff members who have an interest in
the matters also may be present.
The General Counsel of the
Commission, or his designee, has
certified that, in his opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c)(3), (5), (7), 9(B) and (10)
and 17 CFR 200.402(a)(3), (5), (7), 9(ii)
and (10), permit consideration of the
scheduled matters at the Closed
Meeting.
Commissioner Casey, as duty officer,
voted to consider the items listed for the
Closed Meetings in closed session, and
determined that no earlier notice thereof
was possible.
The subject matter of the Closed
Meeting scheduled for Wednesday, July
28, 2010 will be:
Institution and settlement of an
injunctive action; and
Institution and settlement of
administrative proceedings.
The subject matter of the Closed
Meeting scheduled for Thursday, July
29, 2010 will be:
Institution and settlement of
injunctive actions;
16:30 Jul 26, 2010
Dated: July 22, 2010.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010–18451 Filed 7–23–10; 11:15 am]
By the Commission.
Elizabeth M. Murphy,
Secretary.
VerDate Mar<15>2010
Institution and settlement of
administrative proceedings; and
Other matters relating to enforcement
proceedings.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
For further information and to
ascertain what, if any, matters have been
added, deleted or postponed, please
contact:
The Office of the Secretary at (202)
551–5400.
Jkt 220001
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving the
Proposed Rule Change To Adopt
FINRA Rule 5141 (Sale of Securities in
a Fixed Price Offering) in the
Consolidated FINRA Rulebook
July 21, 2010.
I. Introduction
On May 27, 2010, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) (f/k/a National Association of
Securities Dealers, Inc. (‘‘NASD’’)) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposal to adopt
FINRA Rule 5141 (Sale of Securities in
a Fixed Price Offering) in the
consolidated FINRA rulebook and to
delete NASD Rules 0120(h), 2730, 2740
and 2750, and NASD IM–2730, IM–2740
and IM–2750. This proposal was
published for comment in the Federal
Register on June 21, 2010.3 The
Commission received no comments
regarding the proposal. This order
approves this proposed rule change.
II. Description of the Proposed Rule
Change
As part of the process of developing
a new consolidated rulebook
(‘‘Consolidated FINRA Rulebook’’),4
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Securities Exchange Act Release No. 62299
(June 16, 2010), 75 FR 35105 (June 21, 2010) (SR–
FINRA–2010–029) (‘‘Notice’’).
4 The current FINRA rulebook consists of: (1)
FINRA Rules; (2) NASD Rules; and (3) rules
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2 17
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44033
FINRA proposed to adopt FINRA Rule
5141 (Sale of Securities in a Fixed Price
Offering) in the Consolidated FINRA
Rulebook and to delete NASD Rules
0120(h), 2730, 2740 and 2750, and
NASD IM–2730, IM–2740 and IM–2750.
Proposed FINRA Rule 5141 would be
a new, consolidated rule intended to
protect the integrity of fixed price
offerings 5 by ensuring that securities in
such offerings are sold to the public at
the stated public offering price or prices,
thereby preventing an undisclosed
better price. The proposed rule is based
in part on, and would replace, the
current fixed price offering rules (NASD
Rules 0120(h), 2730, 2740 and 2750 and
associated Interpretive Materials (‘‘IMs’’)
2730, 2740 and 2750).6 Like the current
fixed price offering rules, the proposed
rule would prohibit the grant of certain
preferences (e.g., selling concessions,
discounts, other allowances or various
economic equivalents) in connection
with fixed price offerings of securities.
A. Proposed FINRA Rule 5141
Paragraph (a) of the proposed rule
would provide that no member or
person associated with a member that
participates in a selling syndicate or
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).
5 NASD Rule 0120(h) defines the term ‘‘fixed price
offering’’ to mean the offering of securities at a
stated public offering price or prices, all or part of
which securities are publicly offered in the United
States or any territory thereof, whether or not
registered under the Securities Act of 1933. The
term does not include offerings of ‘‘exempted
securities’’ or ‘‘municipal securities’’ as those terms
are defined in Sections 3(a)(12) and 3(a)(29),
respectively, of the Securities Exchange Act or
offerings of redeemable securities of investment
companies registered pursuant to the Investment
Company Act of 1940 which are offered at prices
determined by the net asset value of the securities.
The proposed rule change would incorporate the
definition of ‘‘fixed price offering’’ into the proposed
rule in substantially identical form. See proposed
FINRA Rule 5141.04. See also Section II.B infra and
Section (C) under Item II.C in the Notice.
6 The current fixed price offering rules are also
known as the Papilsky rules because of the court
decision with which they are commonly associated.
See Papilsky v. Berndt, Fed. Sec. L. Rep (CCH) ¶
95,627 (S.D.N.Y. June 24, 1976). For more
information regarding the background of NASD
Rules 0120(h), 2730, 2740 and 2750 and the
associated IMs, see Notice to Members 81–3
(February 1981) (Adoption of New Rules
Concerning Securities Distribution Practices)
(‘‘Notice to Members 81–3’’); see also Securities
Exchange Act Release No. 17371 (December 12,
1980), 45 FR 83707 (December 19, 1980) (File No.
SR–NASD–78–3).
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selling group 7 or that acts as the single
underwriter 8 in connection with a fixed
price offering may offer or grant,
directly or indirectly, to any person 9 or
account that is not a member of the
selling syndicate or selling group or that
is a person or account other than the
single underwriter 10 any securities in
the offering at a price below the stated
public offering price (i.e., a ‘‘reduced
price’’).11
Proposed FINRA Rule 5141(a) further
provides that, subject to the
requirements of FINRA Rule 5130,12 a
member of a selling syndicate or selling
group, or a member that acts as the
single underwriter, would be permitted
to sell securities in the offering to an
affiliated person, provided the member
does not sell the securities to the
affiliated person at a reduced price as
set forth under proposed FINRA Rule
5141.01.13 The requirements of the
7 The terms ‘‘selling group’’ and ‘‘selling
syndicate’’ are defined in NASD Rules 0120(p) and
(q), respectively. Other than to reflect the new
conventions of the Consolidated FINRA Rulebook,
FINRA did not propose to alter these two
definitions.
8 In response to commenter suggestion, FINRA
revised the proposed rule to clarify that it would
apply to any member acting as the single
underwriter in an offering. See Section (A) under
Item II.C in the Notice; see also proposed FINRA
Rules 5141(a), 5141.02 and 5141.03.
9 NASD Rule 0120(n) defines ‘‘person’’ to include
any natural person, partnership, corporation,
association, or other legal entity. Other than to
reflect the new conventions of the Consolidated
FINRA Rulebook, FINRA did not propose to alter
this definition.
10 Proposed FINRA Rule 5141(a) is based in part
on NASD Rule 2740(a), which provides, among
other things, that in connection with the sale of
securities which are part of a fixed price offering
a member may not grant or receive selling
concessions, discounts, or other allowances except
as consideration for services rendered in
distribution and may not grant such concessions,
discounts or other allowances to anyone other than
a broker or dealer actually engaged in the
investment banking or securities business. FINRA
stated that it believes that it serves the interest of
clarity for the new, consolidated rule to specify that
its requirements apply to members of the selling
syndicate or selling group, as those terms are
defined under the FINRA rulebook, or the member
acting as the single underwriter, as applicable.
11 As discussed below, proposed FINRA Rule
5141.01 defines the term ‘‘reduced price’’ for
purposes of the proposed rule.
12 FINRA Rule 5130 (former NASD Rule 2790)
addresses restrictions on the purchase and sale of
initial equity public offerings. The rule generally
prohibits sales to and purchases by a broker-dealer
and accounts in which a broker-dealer has a
beneficial interest.
13 The proposed rule change would eliminate the
general prohibition on transactions with related
persons as set forth in current NASD Rule 2750
(subject, as already discussed, to the requirements
of FINRA Rule 5130). FINRA stated that it believes
that the new, consolidated rule serves the core
purpose of the fixed price offering rules because it
prohibits the conferring of a reduced price on a
person or account that is not a member of the
selling syndicate or selling group or that is a person
or account other than the single underwriter,
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proposed rule would apply until the
termination of the offering or until a
member, having made a bona fide
public offering of the securities, is
unable to continue selling such
securities at the stated public offering
price.14
Proposed FINRA Rule 5141(b)
provides that nothing in the proposed
rule would prohibit the purchase and
sale of securities in a fixed price offering
between members of the selling
syndicate or selling group.15
Proposed FINRA Rule 5141.01 defines
the term ‘‘reduced price.’’ The proposed
rule provides that, for purposes of the
rule, ‘‘reduced price’’ includes, without
limitation, any offer or grant of any
selling concession, discount or other
allowance, credit, rebate, reduction of
any fee (including any advisory or
service fee), any sale of products or
services at prices below reasonable
commercially available rates for similar
products and services (except for
research, which, as discussed below, is
subject to proposed FINRA Rule
5141.02), or any purchase of or
arrangement to purchase securities from
the person or account at more than their
fair market price in exchange for
securities in the offering.16 FINRA noted
regardless of whether they are an affiliated person.
Accordingly, the new rule would render Rule
2750’s general prohibition on related person
transactions redundant. See Section II.B infra.
14 The proposed rule provides that, for purposes
of the rule, securities in a fixed price offering would
be presumed salable if the securities immediately
trade in the secondary market at a price or prices
which are above the stated public offering price.
This is based in part on NASD Rule 2750(d), which
provides among other things that a member or a
related person of a member is ‘‘presumed not to
have made a bona fide public offering * * * if the
securities being offered immediately trade in the
secondary market at a price or prices which are at
or above the public offering price.’’ FINRA stated
that it believes that the standard set forth in the
proposed rule is clear and easily applied. See
Section (F) under Item II.C in the Notice. FINRA
noted that the proposed rule does not attempt to
define ‘‘bona fide public offering’’ per se because the
term ‘‘bona fide’’ speaks for itself and, as noted in
current IM–2750, any such determination must rest
on the basis of all relevant facts and circumstances.
15 FINRA stated that it believes that it serves the
interest of regulatory clarity for the new,
consolidated rule to provide that the rule does not
prohibit this aspect of the underwriting process.
16 The proposed rule defines ‘‘fair market price’’
to refer generally to a price or range of prices at
which a buyer and a seller, each unrelated to the
other, would purchase the securities in the ordinary
course of business in transactions that are of similar
size and similar characteristics and are independent
of any other transaction. FINRA stated that it
believes that this standard, based in part on current
NASD Rule 2730(b)(2), is straightforward and easily
applied. For further discussion, see Section (E)
under Item II.C in the Notice. Similarly, FINRA
stated that it believes that the standard ‘‘reasonable
commercially available rates for similar products
and services’’—new for purposes of the proposed
rule—is clear and effective. Lastly, FINRA noted
that the proposed definition of ‘‘fair market price’’
PO 00000
Frm 00120
Fmt 4703
Sfmt 4703
that the proposed rule’s approach of
setting forth a definition for the term
‘‘reduced price’’ is new and is designed,
like the current fixed price offering
rules, to prohibit in comprehensive
terms the direct or indirect offering of
various economic equivalents of a price
below the stated public offering price.
For example, under the proposed
definition of ‘‘reduced price’’ the
practice of overtrading—addressed
under current NASD Rule 2730 17—
would be prohibited. Similarly, under
the proposed definition improper
underwriting recapture—addressed
under current NASD Rule 2740 18—
would also be prohibited.
Proposed FINRA Rule 5141.02 is
based generally on NASD Rules
2740(a)(1) and (b) and IM–2740 and
would preserve the allowance permitted
under those rules with respect to
research services. Specifically, the
proposed rule provides that nothing in
the new rule would prohibit a member
or person associated with a member that
participates in a selling syndicate or
selling group, or that acts as the single
underwriter, from selling securities in
the offering to a person or account to
which it has provided or will provide
research, provided the person or
account pays the stated public offering
price for the securities and the research
is provided pursuant to 19 the
requirements of Section 28(e) of the
Act.20 The proposed rule would provide
is solely for purposes of proposed FINRA Rule 5141
and is not intended to affect any other provisions
with respect to pricing that are set forth in FINRA
rules.
17 When Rule 2730 was adopted in its current
form—then designated as Section 8 of Article III of
the Rules of Fair Practice—FINRA explained: ‘‘An
overtrade occurs when, as part of a swap, a dealer
pays more for securities purchased from an
institution than their fair market price. It also
occurs if the member acting as agent charges less
than a normal commission. In either event, the net
effect of what the customer receives is a discount
from the public offering price and is therefore
prohibited.’’ See Notice to Members 81–3.
18 In Notice to Members 81–3, FINRA explained
that Rule 2740, then designated as Section 24 of
Article III of the Rules of Fair Practice, ‘‘serves the
twofold function of promoting the securities
distribution process and assuring that the selling
concession, discount or other allowance offered to
professional broker/dealers to facilitate the
distribution of securities to investors is given,
consistent with the representations made to the
public in prospectuses, only to persons who are
entitled to it. Thus, the section prohibits the
surreptitious and unfair discriminatory granting of
a discount to select investors who are in a position
to take advantage of various recapture devices.’’
19 FINRA made a minor revision to proposed
FINRA Rule 5141.02 so as to clarify that research,
in order to qualify under the proposed rule, must
be provided pursuant to the cited provision of the
Act. See Regulatory Notice 09–45 (Fixed Price
Offerings) (August 2009).
20 FINRA noted their belief that proposed FINRA
Rule 5141.02 serves the interest of regulatory clarity
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Federal Register / Vol. 75, No. 143 / Tuesday, July 27, 2010 / Notices
that, like current NASD Rule 2740(b)
and IM–2740, investment management
or investment discretionary services are
not research. The proposed rule further
requires that any product or service
provided by a member or person
associated with a member that does not
qualify as research must not confer a
reduced price as set forth in proposed
FINRA Rule 5141.01.
Proposed FINRA Rule 5141.03 is new
and provides that transactions between
a member of a selling syndicate or
selling group, or between a single
underwriter, and an affiliated person
that are part of the normal and ordinary
course of business and are unrelated to
the sale or purchase of securities in a
fixed price offering would not be
deemed to confer a reduced price under
the rule.21
Proposed FINRA Rule 5141.04
incorporates the current definition of
‘‘fixed price offering’’ as set forth in
current NASD Rule 0120(h) with only
minor changes, primarily to reflect the
new conventions of the Consolidated
FINRA Rulebook.22
Lastly, proposed FINRA Rule 5141.05
is new and would clarify that a member
that is an investment adviser may
exempt securities that are purchased as
part of a fixed price offering from the
calculation of annual or periodic assetbased fees that the member charges a
customer, provided the exemption is
part of the member’s normal and
ordinary course of business with the
customer and is not in connection with
an offering.
B. Deletion of NASD Rules 2730, 2740,
2750 and 0120(h) and Associated IMs
2730, 2740 and 2750
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As noted above, proposed FINRA
Rule 5141 is a new, consolidated rule
that is based in part on, and replaces,
the current fixed price offering rules
(NASD Rules 2730, 2740, 2750 and
0120(h) and associated IMs 2730, 2740
and 2750). Following are the specific
requirements set forth in the current
fixed price offering rules that would be
deleted as rendered redundant or
obsolete by the new, consolidated rule:
by articulating the allowance for research in
straightforward and streamlined fashion.
21 FINRA believes that this provision is a useful
clarification that would generally protect ordinarycourse business transactions between members of a
selling syndicate or selling group, or between a
single underwriter, and affiliates from being
deemed transactions that confer a reduced price (so
long as such transactions are unrelated to the sale
or purchase of securities in a fixed price offering).
See Section (D) under Item II.C in the Notice.
22 See note 5.
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1. NASD Rule 2730 and IM–2730
NASD Rule 2730(a) generally
prohibits overtrading by providing that
a member engaged in a fixed price
offering, who purchases or arranges the
purchase of securities taken in trade,
must purchase the securities at a fair
market price at the time of purchase or
act as agent in the sale of such securities
and charge a normal commission. NASD
Rule 2730(b) defines the terms ‘‘taken in
trade,’’ ‘‘fair market price’’ and ‘‘normal
commission.’’ NASD Rule 2730(c) sets
forth certain criteria as to what
constitutes the fair market price of
securities taken in trade.23 FINRA
proposed to delete NASD Rules 2730(a)
through (c) and the corresponding
provisions under IM–2730 because
FINRA believed that proposed FINRA
Rule 5141(a) and the definitions of
‘‘reduced price’’ and ‘‘fair market price’’
set forth in proposed FINRA Rule
5141.01 would serve the purposes of the
NASD provisions in more
straightforward and streamlined fashion
and accordingly render them obsolete.24
NASD Rule 2730(d) addresses how
bid and offer quotations for transactions
subject to Rule 2730 must be obtained.25
FINRA proposed to delete NASD Rule
2730(d) and the corresponding
provisions under IM–2730 because
FINRA believed that they are rendered
obsolete in view of FINRA’s proposed
deletion of the other portions of NASD
Rule 2730.
NASD Rule 2730(e) imposes certain
recordkeeping requirements. Among
other things, the rule requires a member
who purchases a security taken in trade
to keep adequate records to demonstrate
compliance with the rule and to
preserve the records for at least 24
months after the transaction.26 FINRA
proposed to delete NASD Rule 2730(e)
and the corresponding provisions under
IM–2730 because FINRA believed that
they are rendered obsolete in light of
FINRA’s proposed deletion of the other
portions of Rule 2730 and in light of
members’ supervisory and transactional
23 Corresponding interpretive material in the first
paragraph of IM–2730 addresses in detail, for
compliance purposes, a ‘‘safe harbor’’ for certain
transactions in securities with respect to the fair
market price requirements. Corresponding
interpretive materials under ‘‘Presumption of
Noncompliance,’’ ‘‘No Presumptions’’ and ‘‘Fair
Market Price at the Time of Purchase,’’ all under
IM–2730, address additional fair market pricerelated criteria.
24 See notes 16 and 17 and accompanying text.
25 The quotations requirements set forth in NASD
Rule 2730(d) are further elaborated by
corresponding interpretive material under
‘‘Quotations’’ under IM–2730.
26 Corresponding interpretive material under
‘‘Adequate Records’’ under IM–2730 sets forth
additional requirements with respect to
recordkeeping.
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Sfmt 4703
44035
recordkeeping obligations under FINRA
and Commission rules.27
2. NASD Rule 2740 and IM–2740
NASD Rule 2740(a) generally
provides that in connection with a fixed
price offering, selling concessions,
discounts or other allowances may only
be paid to brokers or dealers actually
engaged in the investment banking or
securities business and only as
consideration for services rendered in
distribution.28 Rule 2740(a)(1) provides
that nothing in the rule prohibits a
member from selling securities in a
fixed price offering to any person or
account to whom the member has
provided, or will provide, bona fide
research, if the purchaser pays the
stated public offering price for the
securities. Rule 2740(a)(2) provides that
nothing in the rule prohibits a member
from selling securities in a fixed price
offering that the member owns to any
person at any net price which may be
fixed by the member unless prevented
by agreement. FINRA proposed to delete
NASD Rules 2740(a), (a)(1) and (a)(2)
and the corresponding provisions under
IM–2740 because FINRA believed that
proposed FINRA Rules 5141(a), 5141.01
and 5141.02, in combination, achieve
the purpose of the NASD provisions and
accordingly render them obsolete.29
NASD Rule 2740(b) defines ‘‘bona fide
research’’ to mean advice, rendered
either directly or through publications
or writings, as to the value of securities,
the advisability of investing in,
purchasing, or selling securities, and the
availability of securities or purchasers
or sellers of securities, or analyses and
reports concerning issuers, industries,
securities, economic factors and trends,
portfolio strategy, and performance of
accounts.30 Rule 2740(b) and the
interpretive material under ‘‘Bona Fide
Research Exclusion’’ under IM–2740
further provide that investment
27 The Commission staff remind FINRA members
of their recordkeeping obligations under Rules 17a–
3 and 17a–4 under the Act.
28 Corresponding interpretive material in the first
four paragraphs of IM–2740 provide further
elaboration of requirements with respect to the term
‘‘services in distribution’’ and related issues.
29 See notes 10 and 18 and accompanying text.
30 Corresponding interpretive material under
‘‘Bona Fide Research Exclusion’’ under IM–2740
provides that the definition of ‘‘bona fide research’’
is ‘‘substantially the same’’ as the definition of
research that is set forth under Securities Exchange
Act Section 28(e)(3), and incorporates by reference
Commission guidance as to the circumstances when
the exclusion for bona fide research is available.
The ‘‘Bona Fide Research Exclusion’’ interpretive
material further reiterates that investment
management or investment discretionary services
are not bona fide research. Additional
corresponding interpretive material under ‘‘Indirect
Discounts’’ under IM–2740 addresses products or
services that fail to qualify as bona fide research.
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Federal Register / Vol. 75, No. 143 / Tuesday, July 27, 2010 / Notices
management or investment
discretionary services are not bona fide
research. FINRA proposed to delete
NASD Rule 2740(b) and the
corresponding provisions under IM–
2740 because FINRA believed that
proposed FINRA Rule 5141.02 serves
the purpose of the NASD provisions in
more straightforward and streamlined
fashion and accordingly renders them
obsolete.31
NASD Rule 2740(c) requires a
member who grants a selling
concession, discount or other allowance
to another person to obtain a written
agreement from that person that he or
she will comply with Rule 2740. If a
member grants a selling concession,
discount or other allowance to a nonmember broker or dealer in a foreign
country, the rule requires that the
member must obtain from that nonmember an agreement that it will
comply with NASD Rules 2730 and
2750 (in addition to Rule 2740) as if the
non-member were a member, and that
the non-member will comply with
NASD Rule 2420 as that rule applies to
a non-member broker-dealer in a foreign
country. FINRA proposed to delete
NASD Rule 2740(c) because FINRA
believed that it is sufficient to apply the
requirements of the new, consolidated
rule to FINRA members. The
relationships between foreign nonmembers and their customers are
beyond the scope of the proposed rule
change.32 FINRA noted that the
requirements of proposed FINRA Rule
5141 would apply to members—and
would reach any reduced prices that
members offer or grant to nonmembers—regardless of whether
agreements to comply with rules are
obtained.33
NASD Rule 2740(d) requires a
member that receives an order from any
person designating another broker or
dealer to receive credit for the sale to
file reports with FINRA within thirty
days after the end of each calendar
quarter with respect to each fixed price
offering that terminated during the
quarter. The rule further specifies
certain information the reports must
contain. NASD Rule 2740(e) requires a
member that is designated by its
customer for the sale of securities to
31 See
notes 19 and 20 and accompanying text.
terms in foreign jurisdictions
vary considerably, as do applicable regulatory
requirements.
33 For further discussion see Section (G) under
Item II.C in the Notice. FINRA notes that NASD
Rule 2420 is being addressed separately as part of
the rulebook consolidation process. See Regulatory
Notice 09–69 (FINRA Requests Comment on
Proposed Consolidated FINRA Rule Governing
Payments to Unregistered Persons) (December
2009).
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32 Underwriting
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keep and maintain for twenty-four
months records of information similar to
that set forth in NASD Rule 2740(d).
FINRA proposed to delete NASD Rules
2740(d) and (e) because FINRA believed
that they are rendered obsolete in light
of the proposed deletion of the other
portions of NASD Rule 2740 and in light
of members’ supervisory and
transactional recordkeeping obligations
under FINRA and Commission rules.34
Further, FINRA noted that its regulatory
programs in connection with the
proposed rule change will not require
specific quarterly filings such as those
currently required pursuant to NASD
Rule 2740(d).
3. NASD Rule 2750 and IM–2750
NASD Rule 2750(a) provides that no
member engaged in a fixed price
offering of securities is permitted to sell
the securities to, or place the securities
with, any person or account which is a
related person of the member, unless the
related person is itself subject to the rule
or is a non-member broker-dealer that
has entered into the agreements
required under Rule 2740(c). NASD
Rules 2750(b) and (c) address criteria
pertaining to the term ‘‘related person.’’
As discussed earlier, the proposed rule
change would eliminate the
prohibitions under Rule 2750(a), which
FINRA believes would be redundant in
light of the proposed rule’s overall
protections against the conferring of a
reduced price.35 Accordingly, FINRA
proposed to delete NASD Rule 2750(a),
as well as Rules 2750(b) and (c), as
FINRA believed that the criteria
pertaining to the term ‘‘related person’’
would be rendered obsolete.
NASD Rule 2750(d) provides that the
rule’s prohibitions do not apply to the
sale or placement of securities in a
trading or investment account of a
member or a related person of a member
after the termination of the fixed price
offering if the member or related person
has made a bona fide public offering of
the securities.36 FINRA proposed to
delete NASD Rule 2750(d) and the
corresponding provisions under IM–
2750 because FINRA believed that the
provisions are obsolete in light of the
proposed deletion of the other portions
of Rule 2750.
The first paragraph of IM–2750
addresses certain conditions under
34 The Commission staff again remind FINRA
members of their recordkeeping obligations under
Rules 17a–3 and 17a–4 under the Act.
35 See note 13 and accompanying text.
36 NASD Rule 2750(d) and corresponding
interpretive material in the second paragraph under
IM–2750 further set forth certain provisions with
respect to bona fide public offerings. See note 13
and accompanying text.
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
which a member that acts or plans to act
as a sponsor of a unit investment trust
is deemed not to violate Rule 2750.
FINRA proposed to delete the IM
provisions because FINRA believed that
they are obsolete in light of the
proposed deletion of the other portions
of NASD Rule 2750.
Lastly, as noted earlier in this filing,
the proposed rule change would
incorporate the definition of ‘‘fixed price
offering’’ set forth in current NASD Rule
0120(h) into the proposed rule in
substantially identical form.37
Accordingly, NASD Rule 0120(h) would
be deleted.
FINRA will announce the effective
date of the proposed rule change in a
Regulatory Notice to be published no
later than 90 days following
Commission approval. The effective
date will be no later than 180 days
following publication of the Regulatory
Notice announcing Commission
approval.
III. Discussion and Findings
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act, and the rules and regulations
thereunder that are applicable to a
national securities association.38 In
particular, the Commission believes that
the proposed rule change is consistent
with the provisions of Section 15A(b)(6)
of the Act,39 which requires, among
other things, that FINRA 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 streamline and
reorganize the existing rules and protect
the integrity of fixed price offerings by
ensuring that securities in such offerings
are sold to the public at the stated
public offering price or prices, thereby
preventing an undisclosed better price.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,40 that the
proposed rule change (File No. SR–
FINRA–2010–029) be, and hereby is,
approved.41
37 See
note 5.
approving this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
39 15 U.S.C. 78o–3(b)(6).
40 15 U.S.C. 78s(b)(2).
41 17 CFR 200.30–3(a)(12).
38 In
E:\FR\FM\27JYN1.SGM
27JYN1
44037
Federal Register / Vol. 75, No. 143 / Tuesday, July 27, 2010 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–18301 Filed 7–26–10; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–62543; File No. SR–
NASDAQ–2010–075]
Self-Regulatory Organizations; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change by The
NASDAQ Stock Market LLC Relating to
Fees for Execution of Contracts on the
NASDAQ Options Market
July 21, 2010.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘Act’’)1
and Rule 19b–4 thereunder,2 notice is
hereby given that, on June 30, 2010, The
NASDAQ Stock Market LLC
(‘‘NASDAQ’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to modify
Exchange Rule 7050 governing pricing
for NASDAQ members using the
NASDAQ Options Market (‘‘NOM’’),
NASDAQ’s facility for executing and
routing standardized equity and index
options. Specifically, NOM proposes to:
(i) Modify pricing for both Penny Pilot3
Options and All Other Options with
respect to the fees for adding 4 and
removing liquidity 5 as well as the
rebates for adding and removing
liquidity; (ii) eliminate the rebates for
adding and fees for removing liquidity
in options overlying Standard and
Poor’s Depositary Receipts/SPDRs
(‘‘SPY’’),6 PowerShares QQQ Trust
(‘‘QQQQ’’)® and Ishares Russell 2000
(‘‘IWM’’); (iii) eliminate the fee for an
order that executes against another
order entered by the same firm; and (iv)
allow a rebate for Customer orders
which execute against other customer
orders.
While changes pursuant to this
proposal are effective upon filing, the
Exchange has designated these changes
to be operative for transactions on July
1, 2010.
The text of the proposed rule change
is set forth below. Proposed new text is
in italic and deleted text is in [brackets].
7050. NASDAQ Options Market
The following charges shall apply to the
use of the order execution and routing
services of the NASDAQ Options
Market for all securities.
(1) Fees for Execution of Contracts on
the NASDAQ Options Market
FEES AND REBATES
(per executed contract)
Customer
Penny Pilot Options:
Rebate to Add Liquidity ............................................................................
Fee for Removing Liquidity .......................................................................
[IWM, QQQQ, SPY]
[Rebate to Add Liquidity] ..........................................................................
[Fee for Removing Liquidity] .....................................................................
NDX and MNX
Rebate to Add Liquidity ............................................................................
Fee for Removing Liquidity .......................................................................
All Other Options:
Fee for Adding Liquidity ...........................................................................
Fee for Removing Liquidity .......................................................................
Rebate [for] to [Removing] Add Liquidity[*] ..............................................
[Transactions in which the same
participant is the buyer and the seller
shall be charged a net fee of $0.10 per
executed contract.]
[*No rebate will be paid when a
customer order executes against another
customer order.]
*
*
*
*
*
The text of the proposed rule change
is available on the Exchange’s Web site
sroberts on DSKD5P82C1PROD with NOTICES
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 The Penny Pilot was established in March 2008
and in October 2009 was expanded and extended
through December 31, 2010. See Securities
Exchange Act Release Nos. 57579 (March 28, 2008),
73 FR 18587 (April 4, 2008) (SR–NASDAQ–2008–
026) (notice of filing and immediate effectiveness
establishing Penny Pilot); 60874 (October 23, 2009),
74 FR 56682 (November 2, 2009) (SR–NASDAQ–
2009–091) (notice of filing and immediate
2 17
VerDate Mar<15>2010
16:30 Jul 26, 2010
Jkt 220001
Firm
Non-NOM
market maker
NOM market
maker
$0.[25]32
$0.[35]40
$0.[25]10
$0.45
$0.25
$0.45
$0.[25]30
$0.45
[$0.30]
[$0.35]
[$0.30]
[$0.45]
[$0.30]
[$0.45]
[$0.30]
[$0.45]
$0.10
$0.50
$0.10
$0.50
$0.10
$0.50
$0.20
$0.40
[Free]$0.00
[¥]$0.40
$0.20
$0.[30]45
$0.4[0]5
[¥]$0.00
$0.[30]45
$0.45
[¥]$0.00
$0.30
$0.45
$0.00[¥]
at https://
www.nasdaqomx.cchwallstreet.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
effectiveness expanding and extending Penny
Pilot); 60965 (November 9, 2009), 74 FR 59292
(November 17, 2009) (SR–NASDAQ–2009–097)
(notice of filing and immediate effectiveness adding
seventy-five classes to Penny Pilot); 61455
(February 1, 2010), 75 FR 6239 (February 8, 2010)
(SR–NASDAQ–2010–013) (notice of filing and
immediate effectiveness adding seventy-five classes
to Penny Pilot); and 62029 (May 4, 2010), 75 FR
25895 (May 10, 2010) (SR–NASDAQ–2010–053)
(notice of filing and immediate effectiveness adding
seventy-five classes to Penny Pilot). See also
Exchange Rule Chapter VI, Section 5.
4 An order that adds liquidity is one that is
entered into NOM and rests on the NOM book.
5 An order that removes liquidity is one that is
entered into NOM and that executes against an
order resting on the NOM book.
6 SPY options are based on the SPDR exchangetraded fund (‘‘ETF’’), which is designed to track the
performance of the S&P 500 Index.
PO 00000
Frm 00123
Fmt 4703
Sfmt 4703
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
E:\FR\FM\27JYN1.SGM
27JYN1
]]>Agencies
[Federal Register Volume 75, Number 143 (Tuesday, July 27, 2010)]
[Notices]
[Pages 44033-44037]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-18301]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62539; File No. SR-FINRA-2010-029]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving the Proposed Rule Change To Adopt
FINRA Rule 5141 (Sale of Securities in a Fixed Price Offering) in the
Consolidated FINRA Rulebook
July 21, 2010.
I. Introduction
On May 27, 2010, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc.
(``NASD'')) filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposal to adopt FINRA Rule 5141 (Sale of Securities in a Fixed Price
Offering) in the consolidated FINRA rulebook and to delete NASD Rules
0120(h), 2730, 2740 and 2750, and NASD IM-2730, IM-2740 and IM-2750.
This proposal was published for comment in the Federal Register on June
21, 2010.\3\ The Commission received no comments regarding the
proposal. This order approves this proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 62299 (June 16, 2010),
75 FR 35105 (June 21, 2010) (SR-FINRA-2010-029) (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
As part of the process of developing a new consolidated rulebook
(``Consolidated FINRA Rulebook''),\4\ FINRA proposed to adopt FINRA
Rule 5141 (Sale of Securities in a Fixed Price Offering) in the
Consolidated FINRA Rulebook and to delete NASD Rules 0120(h), 2730,
2740 and 2750, and NASD IM-2730, IM-2740 and IM-2750.
---------------------------------------------------------------------------
\4\ The current FINRA rulebook consists of: (1) FINRA Rules; (2)
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated
NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules
are referred to as the ``Transitional Rulebook''). While the NASD
Rules generally apply to all FINRA members, the Incorporated NYSE
Rules apply only to those members of FINRA that are also members of
the NYSE (``Dual Members''). The FINRA Rules apply to all FINRA
members, unless such rules have a more limited application by their
terms. For more information about the rulebook consolidation
process, see Information Notice, March 12, 2008 (Rulebook
Consolidation Process).
---------------------------------------------------------------------------
Proposed FINRA Rule 5141 would be a new, consolidated rule intended
to protect the integrity of fixed price offerings \5\ by ensuring that
securities in such offerings are sold to the public at the stated
public offering price or prices, thereby preventing an undisclosed
better price. The proposed rule is based in part on, and would replace,
the current fixed price offering rules (NASD Rules 0120(h), 2730, 2740
and 2750 and associated Interpretive Materials (``IMs'') 2730, 2740 and
2750).\6\ Like the current fixed price offering rules, the proposed
rule would prohibit the grant of certain preferences (e.g., selling
concessions, discounts, other allowances or various economic
equivalents) in connection with fixed price offerings of securities.
---------------------------------------------------------------------------
\5\ NASD Rule 0120(h) defines the term ``fixed price offering''
to mean the offering of securities at a stated public offering price
or prices, all or part of which securities are publicly offered in
the United States or any territory thereof, whether or not
registered under the Securities Act of 1933. The term does not
include offerings of ``exempted securities'' or ``municipal
securities'' as those terms are defined in Sections 3(a)(12) and
3(a)(29), respectively, of the Securities Exchange Act or offerings
of redeemable securities of investment companies registered pursuant
to the Investment Company Act of 1940 which are offered at prices
determined by the net asset value of the securities. The proposed
rule change would incorporate the definition of ``fixed price
offering'' into the proposed rule in substantially identical form.
See proposed FINRA Rule 5141.04. See also Section II.B infra and
Section (C) under Item II.C in the Notice.
\6\ The current fixed price offering rules are also known as the
Papilsky rules because of the court decision with which they are
commonly associated. See Papilsky v. Berndt, Fed. Sec. L. Rep (CCH)
] 95,627 (S.D.N.Y. June 24, 1976). For more information regarding
the background of NASD Rules 0120(h), 2730, 2740 and 2750 and the
associated IMs, see Notice to Members 81-3 (February 1981) (Adoption
of New Rules Concerning Securities Distribution Practices) (``Notice
to Members 81-3''); see also Securities Exchange Act Release No.
17371 (December 12, 1980), 45 FR 83707 (December 19, 1980) (File No.
SR-NASD-78-3).
---------------------------------------------------------------------------
A. Proposed FINRA Rule 5141
Paragraph (a) of the proposed rule would provide that no member or
person associated with a member that participates in a selling
syndicate or
[[Page 44034]]
selling group \7\ or that acts as the single underwriter \8\ in
connection with a fixed price offering may offer or grant, directly or
indirectly, to any person \9\ or account that is not a member of the
selling syndicate or selling group or that is a person or account other
than the single underwriter \10\ any securities in the offering at a
price below the stated public offering price (i.e., a ``reduced
price'').\11\
---------------------------------------------------------------------------
\7\ The terms ``selling group'' and ``selling syndicate'' are
defined in NASD Rules 0120(p) and (q), respectively. Other than to
reflect the new conventions of the Consolidated FINRA Rulebook,
FINRA did not propose to alter these two definitions.
\8\ In response to commenter suggestion, FINRA revised the
proposed rule to clarify that it would apply to any member acting as
the single underwriter in an offering. See Section (A) under Item
II.C in the Notice; see also proposed FINRA Rules 5141(a), 5141.02
and 5141.03.
\9\ NASD Rule 0120(n) defines ``person'' to include any natural
person, partnership, corporation, association, or other legal
entity. Other than to reflect the new conventions of the
Consolidated FINRA Rulebook, FINRA did not propose to alter this
definition.
\10\ Proposed FINRA Rule 5141(a) is based in part on NASD Rule
2740(a), which provides, among other things, that in connection with
the sale of securities which are part of a fixed price offering a
member may not grant or receive selling concessions, discounts, or
other allowances except as consideration for services rendered in
distribution and may not grant such concessions, discounts or other
allowances to anyone other than a broker or dealer actually engaged
in the investment banking or securities business. FINRA stated that
it believes that it serves the interest of clarity for the new,
consolidated rule to specify that its requirements apply to members
of the selling syndicate or selling group, as those terms are
defined under the FINRA rulebook, or the member acting as the single
underwriter, as applicable.
\11\ As discussed below, proposed FINRA Rule 5141.01 defines the
term ``reduced price'' for purposes of the proposed rule.
---------------------------------------------------------------------------
Proposed FINRA Rule 5141(a) further provides that, subject to the
requirements of FINRA Rule 5130,\12\ a member of a selling syndicate or
selling group, or a member that acts as the single underwriter, would
be permitted to sell securities in the offering to an affiliated
person, provided the member does not sell the securities to the
affiliated person at a reduced price as set forth under proposed FINRA
Rule 5141.01.\13\ The requirements of the proposed rule would apply
until the termination of the offering or until a member, having made a
bona fide public offering of the securities, is unable to continue
selling such securities at the stated public offering price.\14\
---------------------------------------------------------------------------
\12\ FINRA Rule 5130 (former NASD Rule 2790) addresses
restrictions on the purchase and sale of initial equity public
offerings. The rule generally prohibits sales to and purchases by a
broker-dealer and accounts in which a broker-dealer has a beneficial
interest.
\13\ The proposed rule change would eliminate the general
prohibition on transactions with related persons as set forth in
current NASD Rule 2750 (subject, as already discussed, to the
requirements of FINRA Rule 5130). FINRA stated that it believes that
the new, consolidated rule serves the core purpose of the fixed
price offering rules because it prohibits the conferring of a
reduced price on a person or account that is not a member of the
selling syndicate or selling group or that is a person or account
other than the single underwriter, regardless of whether they are an
affiliated person. Accordingly, the new rule would render Rule
2750's general prohibition on related person transactions redundant.
See Section II.B infra.
\14\ The proposed rule provides that, for purposes of the rule,
securities in a fixed price offering would be presumed salable if
the securities immediately trade in the secondary market at a price
or prices which are above the stated public offering price. This is
based in part on NASD Rule 2750(d), which provides among other
things that a member or a related person of a member is ``presumed
not to have made a bona fide public offering * * * if the securities
being offered immediately trade in the secondary market at a price
or prices which are at or above the public offering price.'' FINRA
stated that it believes that the standard set forth in the proposed
rule is clear and easily applied. See Section (F) under Item II.C in
the Notice. FINRA noted that the proposed rule does not attempt to
define ``bona fide public offering'' per se because the term ``bona
fide'' speaks for itself and, as noted in current IM-2750, any such
determination must rest on the basis of all relevant facts and
circumstances.
---------------------------------------------------------------------------
Proposed FINRA Rule 5141(b) provides that nothing in the proposed
rule would prohibit the purchase and sale of securities in a fixed
price offering between members of the selling syndicate or selling
group.\15\
---------------------------------------------------------------------------
\15\ FINRA stated that it believes that it serves the interest
of regulatory clarity for the new, consolidated rule to provide that
the rule does not prohibit this aspect of the underwriting process.
---------------------------------------------------------------------------
Proposed FINRA Rule 5141.01 defines the term ``reduced price.'' The
proposed rule provides that, for purposes of the rule, ``reduced
price'' includes, without limitation, any offer or grant of any selling
concession, discount or other allowance, credit, rebate, reduction of
any fee (including any advisory or service fee), any sale of products
or services at prices below reasonable commercially available rates for
similar products and services (except for research, which, as discussed
below, is subject to proposed FINRA Rule 5141.02), or any purchase of
or arrangement to purchase securities from the person or account at
more than their fair market price in exchange for securities in the
offering.\16\ FINRA noted that the proposed rule's approach of setting
forth a definition for the term ``reduced price'' is new and is
designed, like the current fixed price offering rules, to prohibit in
comprehensive terms the direct or indirect offering of various economic
equivalents of a price below the stated public offering price. For
example, under the proposed definition of ``reduced price'' the
practice of overtrading--addressed under current NASD Rule 2730 \17\--
would be prohibited. Similarly, under the proposed definition improper
underwriting recapture--addressed under current NASD Rule 2740 \18\--
would also be prohibited.
---------------------------------------------------------------------------
\16\ The proposed rule defines ``fair market price'' to refer
generally to a price or range of prices at which a buyer and a
seller, each unrelated to the other, would purchase the securities
in the ordinary course of business in transactions that are of
similar size and similar characteristics and are independent of any
other transaction. FINRA stated that it believes that this standard,
based in part on current NASD Rule 2730(b)(2), is straightforward
and easily applied. For further discussion, see Section (E) under
Item II.C in the Notice. Similarly, FINRA stated that it believes
that the standard ``reasonable commercially available rates for
similar products and services''--new for purposes of the proposed
rule--is clear and effective. Lastly, FINRA noted that the proposed
definition of ``fair market price'' is solely for purposes of
proposed FINRA Rule 5141 and is not intended to affect any other
provisions with respect to pricing that are set forth in FINRA
rules.
\17\ When Rule 2730 was adopted in its current form--then
designated as Section 8 of Article III of the Rules of Fair
Practice--FINRA explained: ``An overtrade occurs when, as part of a
swap, a dealer pays more for securities purchased from an
institution than their fair market price. It also occurs if the
member acting as agent charges less than a normal commission. In
either event, the net effect of what the customer receives is a
discount from the public offering price and is therefore
prohibited.'' See Notice to Members 81-3.
\18\ In Notice to Members 81-3, FINRA explained that Rule 2740,
then designated as Section 24 of Article III of the Rules of Fair
Practice, ``serves the twofold function of promoting the securities
distribution process and assuring that the selling concession,
discount or other allowance offered to professional broker/dealers
to facilitate the distribution of securities to investors is given,
consistent with the representations made to the public in
prospectuses, only to persons who are entitled to it. Thus, the
section prohibits the surreptitious and unfair discriminatory
granting of a discount to select investors who are in a position to
take advantage of various recapture devices.''
---------------------------------------------------------------------------
Proposed FINRA Rule 5141.02 is based generally on NASD Rules
2740(a)(1) and (b) and IM-2740 and would preserve the allowance
permitted under those rules with respect to research services.
Specifically, the proposed rule provides that nothing in the new rule
would prohibit a member or person associated with a member that
participates in a selling syndicate or selling group, or that acts as
the single underwriter, from selling securities in the offering to a
person or account to which it has provided or will provide research,
provided the person or account pays the stated public offering price
for the securities and the research is provided pursuant to \19\ the
requirements of Section 28(e) of the Act.\20\ The proposed rule would
provide
[[Page 44035]]
that, like current NASD Rule 2740(b) and IM-2740, investment management
or investment discretionary services are not research. The proposed
rule further requires that any product or service provided by a member
or person associated with a member that does not qualify as research
must not confer a reduced price as set forth in proposed FINRA Rule
5141.01.
---------------------------------------------------------------------------
\19\ FINRA made a minor revision to proposed FINRA Rule 5141.02
so as to clarify that research, in order to qualify under the
proposed rule, must be provided pursuant to the cited provision of
the Act. See Regulatory Notice 09-45 (Fixed Price Offerings) (August
2009).
\20\ FINRA noted their belief that proposed FINRA Rule 5141.02
serves the interest of regulatory clarity by articulating the
allowance for research in straightforward and streamlined fashion.
---------------------------------------------------------------------------
Proposed FINRA Rule 5141.03 is new and provides that transactions
between a member of a selling syndicate or selling group, or between a
single underwriter, and an affiliated person that are part of the
normal and ordinary course of business and are unrelated to the sale or
purchase of securities in a fixed price offering would not be deemed to
confer a reduced price under the rule.\21\
---------------------------------------------------------------------------
\21\ FINRA believes that this provision is a useful
clarification that would generally protect ordinary-course business
transactions between members of a selling syndicate or selling
group, or between a single underwriter, and affiliates from being
deemed transactions that confer a reduced price (so long as such
transactions are unrelated to the sale or purchase of securities in
a fixed price offering). See Section (D) under Item II.C in the
Notice.
---------------------------------------------------------------------------
Proposed FINRA Rule 5141.04 incorporates the current definition of
``fixed price offering'' as set forth in current NASD Rule 0120(h) with
only minor changes, primarily to reflect the new conventions of the
Consolidated FINRA Rulebook.\22\
---------------------------------------------------------------------------
\22\ See note 5.
---------------------------------------------------------------------------
Lastly, proposed FINRA Rule 5141.05 is new and would clarify that a
member that is an investment adviser may exempt securities that are
purchased as part of a fixed price offering from the calculation of
annual or periodic asset-based fees that the member charges a customer,
provided the exemption is part of the member's normal and ordinary
course of business with the customer and is not in connection with an
offering.
B. Deletion of NASD Rules 2730, 2740, 2750 and 0120(h) and Associated
IMs 2730, 2740 and 2750
As noted above, proposed FINRA Rule 5141 is a new, consolidated
rule that is based in part on, and replaces, the current fixed price
offering rules (NASD Rules 2730, 2740, 2750 and 0120(h) and associated
IMs 2730, 2740 and 2750). Following are the specific requirements set
forth in the current fixed price offering rules that would be deleted
as rendered redundant or obsolete by the new, consolidated rule:
1. NASD Rule 2730 and IM-2730
NASD Rule 2730(a) generally prohibits overtrading by providing that
a member engaged in a fixed price offering, who purchases or arranges
the purchase of securities taken in trade, must purchase the securities
at a fair market price at the time of purchase or act as agent in the
sale of such securities and charge a normal commission. NASD Rule
2730(b) defines the terms ``taken in trade,'' ``fair market price'' and
``normal commission.'' NASD Rule 2730(c) sets forth certain criteria as
to what constitutes the fair market price of securities taken in
trade.\23\ FINRA proposed to delete NASD Rules 2730(a) through (c) and
the corresponding provisions under IM-2730 because FINRA believed that
proposed FINRA Rule 5141(a) and the definitions of ``reduced price''
and ``fair market price'' set forth in proposed FINRA Rule 5141.01
would serve the purposes of the NASD provisions in more straightforward
and streamlined fashion and accordingly render them obsolete.\24\
---------------------------------------------------------------------------
\23\ Corresponding interpretive material in the first paragraph
of IM-2730 addresses in detail, for compliance purposes, a ``safe
harbor'' for certain transactions in securities with respect to the
fair market price requirements. Corresponding interpretive materials
under ``Presumption of Noncompliance,'' ``No Presumptions'' and
``Fair Market Price at the Time of Purchase,'' all under IM-2730,
address additional fair market price-related criteria.
\24\ See notes 16 and 17 and accompanying text.
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NASD Rule 2730(d) addresses how bid and offer quotations for
transactions subject to Rule 2730 must be obtained.\25\ FINRA proposed
to delete NASD Rule 2730(d) and the corresponding provisions under IM-
2730 because FINRA believed that they are rendered obsolete in view of
FINRA's proposed deletion of the other portions of NASD Rule 2730.
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\25\ The quotations requirements set forth in NASD Rule 2730(d)
are further elaborated by corresponding interpretive material under
``Quotations'' under IM-2730.
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NASD Rule 2730(e) imposes certain recordkeeping requirements. Among
other things, the rule requires a member who purchases a security taken
in trade to keep adequate records to demonstrate compliance with the
rule and to preserve the records for at least 24 months after the
transaction.\26\ FINRA proposed to delete NASD Rule 2730(e) and the
corresponding provisions under IM-2730 because FINRA believed that they
are rendered obsolete in light of FINRA's proposed deletion of the
other portions of Rule 2730 and in light of members' supervisory and
transactional recordkeeping obligations under FINRA and Commission
rules.\27\
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\26\ Corresponding interpretive material under ``Adequate
Records'' under IM-2730 sets forth additional requirements with
respect to recordkeeping.
\27\ The Commission staff remind FINRA members of their
recordkeeping obligations under Rules 17a-3 and 17a-4 under the Act.
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2. NASD Rule 2740 and IM-2740
NASD Rule 2740(a) generally provides that in connection with a
fixed price offering, selling concessions, discounts or other
allowances may only be paid to brokers or dealers actually engaged in
the investment banking or securities business and only as consideration
for services rendered in distribution.\28\ Rule 2740(a)(1) provides
that nothing in the rule prohibits a member from selling securities in
a fixed price offering to any person or account to whom the member has
provided, or will provide, bona fide research, if the purchaser pays
the stated public offering price for the securities. Rule 2740(a)(2)
provides that nothing in the rule prohibits a member from selling
securities in a fixed price offering that the member owns to any person
at any net price which may be fixed by the member unless prevented by
agreement. FINRA proposed to delete NASD Rules 2740(a), (a)(1) and
(a)(2) and the corresponding provisions under IM-2740 because FINRA
believed that proposed FINRA Rules 5141(a), 5141.01 and 5141.02, in
combination, achieve the purpose of the NASD provisions and accordingly
render them obsolete.\29\
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\28\ Corresponding interpretive material in the first four
paragraphs of IM-2740 provide further elaboration of requirements
with respect to the term ``services in distribution'' and related
issues.
\29\ See notes 10 and 18 and accompanying text.
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NASD Rule 2740(b) defines ``bona fide research'' to mean advice,
rendered either directly or through publications or writings, as to the
value of securities, the advisability of investing in, purchasing, or
selling securities, and the availability of securities or purchasers or
sellers of securities, or analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio
strategy, and performance of accounts.\30\ Rule 2740(b) and the
interpretive material under ``Bona Fide Research Exclusion'' under IM-
2740 further provide that investment
[[Page 44036]]
management or investment discretionary services are not bona fide
research. FINRA proposed to delete NASD Rule 2740(b) and the
corresponding provisions under IM-2740 because FINRA believed that
proposed FINRA Rule 5141.02 serves the purpose of the NASD provisions
in more straightforward and streamlined fashion and accordingly renders
them obsolete.\31\
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\30\ Corresponding interpretive material under ``Bona Fide
Research Exclusion'' under IM-2740 provides that the definition of
``bona fide research'' is ``substantially the same'' as the
definition of research that is set forth under Securities Exchange
Act Section 28(e)(3), and incorporates by reference Commission
guidance as to the circumstances when the exclusion for bona fide
research is available. The ``Bona Fide Research Exclusion''
interpretive material further reiterates that investment management
or investment discretionary services are not bona fide research.
Additional corresponding interpretive material under ``Indirect
Discounts'' under IM-2740 addresses products or services that fail
to qualify as bona fide research.
\31\ See notes 19 and 20 and accompanying text.
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NASD Rule 2740(c) requires a member who grants a selling
concession, discount or other allowance to another person to obtain a
written agreement from that person that he or she will comply with Rule
2740. If a member grants a selling concession, discount or other
allowance to a non-member broker or dealer in a foreign country, the
rule requires that the member must obtain from that non-member an
agreement that it will comply with NASD Rules 2730 and 2750 (in
addition to Rule 2740) as if the non-member were a member, and that the
non-member will comply with NASD Rule 2420 as that rule applies to a
non-member broker-dealer in a foreign country. FINRA proposed to delete
NASD Rule 2740(c) because FINRA believed that it is sufficient to apply
the requirements of the new, consolidated rule to FINRA members. The
relationships between foreign non-members and their customers are
beyond the scope of the proposed rule change.\32\ FINRA noted that the
requirements of proposed FINRA Rule 5141 would apply to members--and
would reach any reduced prices that members offer or grant to non-
members--regardless of whether agreements to comply with rules are
obtained.\33\
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\32\ Underwriting terms in foreign jurisdictions vary
considerably, as do applicable regulatory requirements.
\33\ For further discussion see Section (G) under Item II.C in
the Notice. FINRA notes that NASD Rule 2420 is being addressed
separately as part of the rulebook consolidation process. See
Regulatory Notice 09-69 (FINRA Requests Comment on Proposed
Consolidated FINRA Rule Governing Payments to Unregistered Persons)
(December 2009).
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NASD Rule 2740(d) requires a member that receives an order from any
person designating another broker or dealer to receive credit for the
sale to file reports with FINRA within thirty days after the end of
each calendar quarter with respect to each fixed price offering that
terminated during the quarter. The rule further specifies certain
information the reports must contain. NASD Rule 2740(e) requires a
member that is designated by its customer for the sale of securities to
keep and maintain for twenty-four months records of information similar
to that set forth in NASD Rule 2740(d). FINRA proposed to delete NASD
Rules 2740(d) and (e) because FINRA believed that they are rendered
obsolete in light of the proposed deletion of the other portions of
NASD Rule 2740 and in light of members' supervisory and transactional
recordkeeping obligations under FINRA and Commission rules.\34\
Further, FINRA noted that its regulatory programs in connection with
the proposed rule change will not require specific quarterly filings
such as those currently required pursuant to NASD Rule 2740(d).
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\34\ The Commission staff again remind FINRA members of their
recordkeeping obligations under Rules 17a-3 and 17a-4 under the Act.
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3. NASD Rule 2750 and IM-2750
NASD Rule 2750(a) provides that no member engaged in a fixed price
offering of securities is permitted to sell the securities to, or place
the securities with, any person or account which is a related person of
the member, unless the related person is itself subject to the rule or
is a non-member broker-dealer that has entered into the agreements
required under Rule 2740(c). NASD Rules 2750(b) and (c) address
criteria pertaining to the term ``related person.'' As discussed
earlier, the proposed rule change would eliminate the prohibitions
under Rule 2750(a), which FINRA believes would be redundant in light of
the proposed rule's overall protections against the conferring of a
reduced price.\35\ Accordingly, FINRA proposed to delete NASD Rule
2750(a), as well as Rules 2750(b) and (c), as FINRA believed that the
criteria pertaining to the term ``related person'' would be rendered
obsolete.
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\35\ See note 13 and accompanying text.
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NASD Rule 2750(d) provides that the rule's prohibitions do not
apply to the sale or placement of securities in a trading or investment
account of a member or a related person of a member after the
termination of the fixed price offering if the member or related person
has made a bona fide public offering of the securities.\36\ FINRA
proposed to delete NASD Rule 2750(d) and the corresponding provisions
under IM-2750 because FINRA believed that the provisions are obsolete
in light of the proposed deletion of the other portions of Rule 2750.
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\36\ NASD Rule 2750(d) and corresponding interpretive material
in the second paragraph under IM-2750 further set forth certain
provisions with respect to bona fide public offerings. See note 13
and accompanying text.
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The first paragraph of IM-2750 addresses certain conditions under
which a member that acts or plans to act as a sponsor of a unit
investment trust is deemed not to violate Rule 2750. FINRA proposed to
delete the IM provisions because FINRA believed that they are obsolete
in light of the proposed deletion of the other portions of NASD Rule
2750.
Lastly, as noted earlier in this filing, the proposed rule change
would incorporate the definition of ``fixed price offering'' set forth
in current NASD Rule 0120(h) into the proposed rule in substantially
identical form.\37\ Accordingly, NASD Rule 0120(h) would be deleted.
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\37\ See note 5.
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FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice to be published no later than 90 days following
Commission approval. The effective date will be no later than 180 days
following publication of the Regulatory Notice announcing Commission
approval.
III. Discussion and Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act, and the rules
and regulations thereunder that are applicable to a national securities
association.\38\ In particular, the Commission believes that the
proposed rule change is consistent with the provisions of Section
15A(b)(6) of the Act,\39\ which requires, among other things, that
FINRA 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 streamline and reorganize
the existing rules and protect the integrity of fixed price offerings
by ensuring that securities in such offerings are sold to the public at
the stated public offering price or prices, thereby preventing an
undisclosed better price.
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\38\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\39\ 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
Act,\40\ that the proposed rule change (File No. SR-FINRA-2010-029) be,
and hereby is, approved.\41\
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\40\ 15 U.S.C. 78s(b)(2).
\41\ 17 CFR 200.30-3(a)(12).
[[Page 44037]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-18301 Filed 7-26-10; 8:45 am]
BILLING CODE 8010-01-P
