Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filings of Amendments No. 1 and 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Amended, To Adopt FINRA Rule 4530 (Reporting Requirements) in the Consolidated FINRA Rulebook, 69508-69514 [2010-28444]
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69508
Federal Register / Vol. 75, No. 218 / Friday, November 12, 2010 / Notices
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the provisions of Section 6(b) of the
Act,4 in general, and Section 6(b)(4) of
the Act,5 in particular, in that it is
designed to provide for the equitable
allocation of reasonable dues, fees and
other charges among its members and
other persons using the facilities of the
Exchange. Moreover, the proposed rule
change is not discriminatory in that all
qualified ETP Holders are eligible to
submit (or not submit) trades and quotes
at any price in AutoEx and Order
Delivery in all tapes, as either displayed
or undisplayed and as liquidity adding
or liquidity taking, and may do so at
their discretion.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any inappropriate burden on
competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The proposed rule change has taken
effect upon filing pursuant to Section
19(b)(3)(A)(ii) of the Act 6 and
subparagraph (f)(2) of Rule 19b–4 7
thereunder, because, as provided in
(f)(2), it changes ‘‘a due, fee or other
charge applicable only to a member’’
(known on the Exchange as an ETP
Holder). At any time within sixty (60)
days of the filing of such proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
IV. 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 rulecomments@sec.gov. Please include File
Number SR–NSX–2010–14 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–NSX–2010–14. 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 Web site viewing and
printing 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 NSX.
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–NSX–2010–14 and should
be submitted on or before December 3,
2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.8
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–28453 Filed 11–10–10; 8:45 am]
4 15
U.S.C. 78f(b).
5 15 U.S.C. 78f(b)(4).
6 15 U.S.C. 78s(b)(3)(A)(ii).
7 17 CFR 240.19b–4.
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63260; File No. SR–FINRA–
2010–034]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filings of
Amendments No. 1 and 2 and Order
Granting Accelerated Approval of a
Proposed Rule Change, as Amended,
To Adopt FINRA Rule 4530 (Reporting
Requirements) in the Consolidated
FINRA Rulebook
November 5, 2010.
I. Introduction
On July 30, 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 (i)
adopt NASD Rule 3070 (Reporting
Requirements) as FINRA Rule 4530 in
the Consolidated FINRA Rulebook, with
certain amendments and the addition of
a supplementary material section, and
(ii) delete paragraphs (a) through (d) of
Incorporated NYSE Rule 351 and
Incorporated NYSE Rules 351.10 and
351.13. The proposal was published for
comment in the Federal Register on
August 9, 2010.3 The Commission
received seven comments on the
proposal.4 On October 18, 2010, FINRA
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 62621
(July 30, 2010), 75 FR 47863 (August 9, 2010)
(‘‘Notice’’).
4 See letter from Brendan Daly, Legal and
Compliance Counsel, Commonwealth Financial
Network, to Elizabeth M. Murphy, Secretary,
Commission, dated August 27, 2010
(‘‘Commonwealth Letter’’); letter from Kristin Bulls,
Products and Broker-Dealer Compliance Director,
State Farm VP Management Corp., to Elizabeth M.
Murphy, Secretary, Commission, dated August 30,
2010 (‘‘State Farm Letter’’); letter from Joan
Hinchman, Executive Director, President and CEO,
National Society of Compliance Professionals, to
Elizabeth M. Murphy, Secretary, Commission, dated
August 30, 2010 (‘‘NSCP Letter’’); letter from Clifford
E. Kirsch and Susan S. Krawczyk, Sutherland Asbill
& Brennan LLP, on behalf of the Committee of
Annuity Insurers, to Elizabeth M. Murphy,
Secretary, Commission, dated August 30, 2010
(‘‘CAI Letter’’); letter from Michael Lesutis, Assistant
General Counsel, PFS Investments, Inc., to
Elizabeth M. Murphy, Secretary, Commission, dated
September 1, 2010 (‘‘PFS Letter’’); letter from James
T. McHale, Managing Director and Associate
General Counsel, Securities Industry and Financial
Markets Association, to Elizabeth M. Murphy,
Secretary, Commission, dated September 1, 2010
(‘‘SIFMA Letter’’); letter from Dale E. Brown,
President and CEO, Financial Services Institute, to
Elizabeth M. Murphy, Secretary, Commission, dated
September 15, 2010 (‘‘FSI Letter’’).
2 17
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among other things, assists FINRA in
identifying and investigating firms,
offices and associated persons that may
pose a regulatory risk.7
Because proposed FINRA Rule 4530 is
based upon NASD Rule 3070, the
following description sets forth a
summary of the ways in which
proposed FINRA Rule 4530 differs from
NASD Rule 3070.
II. Description of the Proposal, as
Modified by Amendments No. 1 and 2
As part of the process of developing
a new consolidated rulebook
(‘‘Consolidated FINRA Rulebook’’),
FINRA proposes to (i) adopt NASD Rule
3070 (Reporting Requirements) as
FINRA Rule 4530 in the Consolidated
FINRA Rulebook, subject to certain
amendments described below and the
addition of a supplementary material
section as detailed below and (ii) delete
paragraphs (a) through (d) of
Incorporated NYSE Rule 351 and
Incorporated NYSE Rules 351.10 and
351.13 from the Transitional Rulebook.
NASD Rule 3070 and Incorporated
NYSE Rule 351 require members to
report to FINRA certain specified events
(e.g., regulatory actions, certain
customer settlements, securities-related
law suits or arbitrations, etc.), to file
with FINRA documents related to such
events, and to report to FINRA quarterly
statistical and summary information
regarding written customer complaints.
FINRA uses the reported information for
regulatory purposes; the information,
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responded to the comments and filed
Amendment No. 1 to the proposed rule
change.5 On October 22, 2010, FINRA
filed Amendment No. 2 to the proposed
rule change.6 The Commission is
publishing this notice and order to
solicit comments on Amendments No. 1
and 2 and to approve the proposed rule
change, as amended, on an accelerated
basis.
A. Reporting Deadline (Proposed FINRA
Rules 4530(a) and 4530.03)
The substantive changes to proposed
FINRA Rule 4530(a) clarify that a firm
must report to FINRA after the firm
‘‘knows or should have known’’ of the
existence of any of the events specified
in paragraph (a) of the proposed rule
and extends the time period for
reporting the events from 10 business
days (as provided under NASD Rule
3070(b)) to no later than 30 calendar
days after the firm knows or should
have known of the event. FINRA states
that the proposed 30-calendar-day
reporting deadline is consistent with
Incorporated NYSE Rule 351 8 and the
reporting deadlines for disclosing
information on forms BD (Uniform
Application for Broker-Dealer
Registration),9 U4 (Uniform Application
for Securities Industry Registration or
Transfer) 10 and U5 (Uniform
Termination Notice for Securities
Industry Registration) 11 (collectively
referred to as the ‘‘Uniform Forms’’).
5 See Amendment No. 1, dated October 18, 2010
(‘‘Amendment No. 1’’). The text of Amendment No.
1 is available on FINRA’s Web site at https://
www.finra.org, at the principal office of FINRA, and
on the Commission’s Web site, https://www.sec.gov/
rules/sro.shtml. In Amendment No. 1, FINRA
responded to the comment letters received
regarding the Notice and revised the proposed rule
change. Among other things, FINRA proposes to
amend (i) proposed FINRA Rule 4530(a)(1)(G) to
require the reporting of any claims for damages by
a customer, broker or dealer that relates to the
provision of financial services or relates to a
financial transaction; (ii) proposed Supplementary
Material .01 to provide clarity on what internal
conclusions of violative conduct a member must
report pursuant to proposed FINRA Rule 4530(b);
(iii) proposed Supplementary Material .07 to clarify
the circumstances under which a firm would not be
required to report information relating to a former
associated person; (iv) proposed Supplementary
Material .08 to clarify a member’s reporting
obligations regarding customer complaints pursuant
to proposed FINRA Rules 4530(a)(1)(B) and 4530(d);
and (v) proposed Supplementary Material .09 to
provide a definition for the term ‘‘financial-related.’’
6 See Amendment No. 2 dated October 22, 2010
(‘‘Amendment No. 2’’). The text of Amendment No.
2 is available on FINRA’s Web site at https://
www.finra.org, at the principal office of FINRA, and
on the Commission’s Web site, https://www.sec.gov/
rules/sro.shtml. In Amendment No. 2, FINRA
proposes to further amend proposed Supplementary
Material .07 to clarify the circumstances under
which a firm would not be required to report
information relating to a former associated person.
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B. External Findings (Proposed FINRA
Rule 4530(a)(1)(A))
NASD Rule 3070(a)(1) requires a firm
to report findings of violations of ‘‘any
provision of any securities laws, or
regulation, any rule or standards of
conduct of any governmental agency,
self-regulatory organization, or financial
business or professional organization.’’
Proposed FINRA Rule 4530(a)(1)(A)
would instead require a firm to report
findings of violations of any ‘‘securities-,
insurance-, commodities-, financial- or
investment-related laws, rules,
regulations or standards of conduct of
any domestic or foreign regulatory body,
self-regulatory organization or business
or professional organization’’ and
eliminates the requirement for firms to
report findings that a member or
associated person has engaged in
conduct inconsistent with just and
7 See
Notice, supra note 3, 75 FR at 47863.
Incorporated NYSE Rule 351(b); NYSE
Information Memo 90–17, ‘‘Timely and Complete
Filings and Responses to Enforcement Inquiries’’
(April 30, 1990) (defining ‘‘prompt’’ filing as
occurring within 30 days of the reportable event).
9 See Article IV, Section 1 of FINRA’s By-Laws.
10 See Article V, Section 2 of FINRA’s By-Laws.
11 See Article V, Section 3 of FINRA’s By-Laws.
8 See
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69509
equitable principles of trade.12 Proposed
Supplementary Material .03 clarifies the
meaning of the term ‘‘found’’ for the
purpose of determining when a firm or
associated person has been ‘‘found to
have’’ engaged in violative conduct.
C. Civil Litigation or Arbitration; Claims
for Damages (Proposed FINRA Rules
4530(a)(1)(G), 4530.06 and 4530.09)
As proposed, FINRA Rule
4530(a)(1)(G) extends the reporting
requirement relating to securities- and
commodities-related civil suits and
arbitrations and claims for damages by
customers and broker-dealers disposed
of by judgment, award or settlement (in
an amount exceeding certain monetary
thresholds) to include ‘‘any financialrelated insurance civil litigation or
arbitration’’ but limits the requirement
to report claims for damages by
customers, brokers or dealers to those
claims for damages that relate to the
provision of financial services or a
financial transaction.13 Proposed
Supplemental Material .06 clarifies that
for purposes of determining whether a
civil suit, arbitration or claim for
damages exceeds the monetary
threshold and must be reported
pursuant to proposed FINRA Rule
4530(a)(1)(G), (1) members must take
into account awards of attorneys fees
and interest, and (2) if parties are
subject to ‘‘joint and several’’ liability,
each party is considered separately
liable for the aggregate amount.14
Proposed Supplemental Material .09
defines the term ‘‘financial related’’ to
mean ‘‘related to the provision of
financial services.’’ 15
D. Statutory Disqualifications (Proposed
FINRA Rule 4530(a)(1)(H))
Proposed FINRA Rule 4530(a)(1)(H)
modifies the reporting requirement in
NASD Rule 3070(a)(9) relating to
statutory disqualifications to clarify that
a member must report to FINRA
whenever the member itself is subject to
a ‘‘statutory disqualification,’’ or
whenever an associated person of the
firm is subject to a ‘‘statutory
disqualification.’’ While NASD Rule
3070(a)(9) requires a member to report
to FINRA if the member or an associated
person of the member ‘‘is associated in
any business or financial activity’’ with
a person subject to a ‘‘statutory
12 FINRA members would still be required to
report findings of violations of an SRO’s just and
equitable principles of trade rule, such as FINRA
Rule 2010. See Notice, supra note 3, 75 FR at 47864.
13 See proposed FINRA Rule 4530(a)(1)(G), as
modified by Amendment No. 1.
14 See proposed FINRA Rule 4530.06.
15 See proposed FINRA Rule 4530.09, as modified
by Amendment No. 1.
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Federal Register / Vol. 75, No. 218 / Friday, November 12, 2010 / Notices
disqualification,’’ proposed FINRA Rule
4530(a)(1)(H) instead requires a member
to report to FINRA whenever the
member or an associated person of the
member ‘‘is involved in the sale of any
financial instrument, the provision of
any investment advice or the financing
of any such activities’’ with a person
subject to a ‘‘statutory
disqualification.’’ 16
E. Internal Disciplinary Actions Against
Associated Persons (Proposed FINRA
Rule 4530(a)(2))
Similar to NASD Rule 3070(a)(10),
proposed FINRA Rule 4530(a)(2)
requires a firm to report certain
disciplinary actions taken by the firm
against its associated persons. Proposed
FINRA Rule 4530(a)(2) states that
disciplinary actions involving the
withholding of compensation or of any
other remuneration in excess of $2,500
are reportable events (as opposed to just
the withholding of commissions, as
provided by NASD Rule 3070(a)(10)).
F. Internal Conclusions (Proposed
FINRA Rules 4530(b), 4530.01 and
4530.02)
Proposed FINRA Rule 4530(b)
requires firms to report internal
conclusions of certain enumerated
violative conduct.17 Specifically, a firm
would be required to report to FINRA
no later than 30 calendar days after the
firm has concluded, or reasonably
should have concluded, that an
associated person of the firm or the firm
itself has violated any securities-,
insurance-, commodities-, financial- or
investment-related laws, rules,
regulations or standards of conduct of
any domestic or foreign regulatory body
or SRO.
Pursuant to proposed Supplementary
Material .01, if a firm disciplines an
associated person in the manner
described in proposed FINRA Rule
4530(a)(2), the firm would be required
to report the event under proposed
FINRA Rule 4530(a)(2).18 In addition,
proposed Supplementary Material .01
clarifies that FINRA only expects a
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16 FINRA
notes that this provision is consistent
with Incorporated NYSE Rule 351(a)(9). See Notice,
supra note 3, 75 FR at 47864.
17 FINRA notes that this proposed rule is
generally based on Incorporated NYSE Rule
351(a)(1), which requires a firm to report whenever
it or its associated persons have violated any
provision of any securities law or regulation, any
agreement with or rule or standard of conduct of
any governmental agency, self-regulatory
organization (‘‘SRO’’), or business or professional
organization, or engaged in conduct that is
inconsistent with just and equitable principles of
trade or detrimental to the interests or welfare of the
NYSE. See Notice, supra note 3, 75 FR at 47864.
18 See proposed FINRA Rule 4530.01, as modified
by Amendment No. 1.
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member to report internal conclusions
pursuant to proposed FINRA Rule
4530(b) relating to violative conduct
that has widespread or potentially
widespread effect on the member, its
customers or markets, or, in the case of
violative conduct of the member, that
arises from a material failure of the
member’s systems, policies or practices
involving numerous customers,
multiple errors or significant dollar
amounts, or, in the case of violative
conduct by an associated person, has a
significant monetary result with respect
to a member(s), customer(s) or market(s)
or where there are multiple instances of
any violative conduct.19
In addition, proposed Supplementary
Material .02 states that proposed FINRA
Rule 4530(b) only requires reporting
where a member has concluded or
reasonably should have concluded on
its own that violative conduct has
occurred, as opposed to where there has
been a finding of violative conduct by
an external body, such as a court,
domestic or foreign regulatory body,
SRO or business or professional
organization (which would be
reportable pursuant to proposed FINRA
Rule 4530(a)(1)(A)).20
G. Reporting Obligation (Proposed
FINRA Rule 4530(e))
Similar to NASD Rule 3070(d),
proposed FINRA Rule 4530(e) provides
that proposed FINRA Rule 4530 does
not relieve a firm or an associated
person from other obligations, such as
the requirement to disclose information
on the Uniform Forms, as applicable. In
addition, proposed FINRA Rule 4530(e)
clarifies that a firm must comply with
the reporting obligations under
proposed FINRA Rules 4530(a) and (b)
and must report quarterly statistical and
summary information regarding written
customer complaints pursuant to
proposed FINRA Rule 4530(d),
regardless of whether such information
is reported or disclosed pursuant to any
other rule or requirement, including the
requirements of the Forms BD or U4.21
H. Elimination of the Exemption for
Dual Members Subject to Another SRO’s
Rule
Proposed FINRA Rule 4530 does not
include the exemption set forth in
NASD Rule 3070(e) for firms subject to
substantially similar reporting
requirements of another SRO because
this provision was intended to exempt
Dual Members subject to the reporting
requirements of NASD Rule 3070 and
the reporting requirements of
Incorporated NYSE Rule 351.22
I. Filing of Related Documents With
FINRA (Proposed FINRA Rule 4530(f))
Consistent with NASD Rule 3070(f),
proposed FINRA Rule 4530(f) requires a
firm to file copies of certain criminal
and civil complaints and arbitration
claims with FINRA. However, proposed
FINRA Rule 4530(f) expands the filing
requirement to include (1) copies of any
complaint in which a member is named
as a defendant or respondent in any
‘‘financial-related insurance private civil
litigation’’ and (2) any ‘‘financial-related
insurance arbitration claim’’ filed
against a member in any forum other
than the FINRA Dispute Resolution
forum.
J. Additional Supplementary Material
(Proposed FINRA Rules 4530.05, .07
and .08)
In addition to the supplementary
material discussed above, FINRA also
proposes as supplementary material the
following clarifications: (1) For
purposes of proposed FINRA Rules
4530(a) and (b), firms should not report
a single event under more than one
paragraph or subparagraph; however,
members may be required to report
related events under more than one
paragraph or subparagraph; 23 (2) for
purposes of proposed FINRA Rules
4530(a), (b) and (d), firms should report
an event relating to a former associated
person if the event occurred while the
individual was associated with the
member; however, a member is not
required to report such an event where,
based on its records or information
available through Web CRD, the member
cannot determine that the person was an
associated person of the member; 24 and
(3) any written customer complaint
reported under proposed FINRA Rule
4530(a)(1)(B) must also be reported
pursuant to proposed FINRA Rule
4350(d); 25 however, for the purpose of
reporting under proposed FINRA Rule
4350(d), a member must report (1) any
written grievance involving the member
or its associated person by a person,
22 See
Notice, supra note 3, 75 FR at 47865.
proposed FINRA Rule 4530.05.
24 See proposed FINRA Rule 4530.07.
25 Proposed FINRA Rule 4530(a)(1)(B) is identical
to NASD Rule 3070(a)(2) and requires a member to
report to FINRA if the member or an associated
person of the member is the subject of any written
customer complaint involving allegations of theft or
misappropriation of funds or securities or of
forgery.
23 See
19 Id.
20 See
proposed FINRA Rule 4530.02.
FINRA Rule 4530(e) provides that a
firm is not required to report an event otherwise
required to be reported under proposed FINRA
Rules 4530(a) or (b) if the firm discloses the event
on a Form U5, consistent with the requirements of
that form.
21 Proposed
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Federal Register / Vol. 75, No. 218 / Friday, November 12, 2010 / Notices
other than a broker or dealer, with
whom the member has engaged in
securities activities and (2) any
securities-related written grievance
involving the member or its associated
person and any written complaint
reportable under proposed Rule
4530(a)(1)(B) by a person other than a
broker or dealer, with whom the
member has sought to engage in
securities activities.26
K. Deletion of Certain Incorporated
NYSE Provisions
FINRA proposes to delete paragraphs
(a) through (d) of Incorporated NYSE
Rule 351 and NYSE Rules 351.10 and
351.13 because these provisions are
substantially similar to, otherwise
incorporated in, or rendered obsolete by
proposed FINRA Rule 4530, or
addressed by other rules.27
III. Summary of Comments and
FINRA’s Response
The Commission received seven
comment letters to the proposed rule
change.28 FINRA responded to the
comments and modified the proposed
rule change in Amendments No. 1
and 2.
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A. Reporting of Insurance-Related
External Findings Under Proposed
FINRA Rule 4530(a)(1)(A)
FINRA Rule 4350(a)(1)(A) requires
members to report, among other things,
external findings of violations of
insurance-related laws, rules, or
regulations. One commenter believes
that the requirement to report
insurance-related external findings is
unwarranted, burdensome, and outside
the scope of FINRA’s authority.29 The
commenter argues that reportable
external findings should be limited to
those that derive from a transaction with
a customer.30 FINRA responds that
current NASD Rule 3070(a)(1) requires a
member to report external findings
relating to violations of any rule or
standard of conduct of any
governmental agency, SRO, or financial
business or professional organization.31
Therefore, members are currently
required to report external findings
related to insurance matters and the
proposed rule simply continues this
requirement and is consistent with other
provisions of FINRA’s rules.32 Finally,
26 See
proposed FINRA Rule 4530.08.
Notice, supra note 3, 75 FR at 47866.
28 See supra, note 4.
29 See State Farm Letter.
30 Id.
31 See Amendment No. 1 at 7.
32 Id. FINRA points to NASD Rule 3070(a)(3) and
NYSE Rule 351(a)(3) (requiring reporting where a
firm or an associated person is named as a
27 See
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FINRA states that this information is
relevant because it assists FINRA in
identifying members and associated
persons that may pose a regulatory
risk.33
In response to a comment that FINRA
should provide additional guidance
regarding what members should identify
and report pursuant to proposed FINRA
Rule 4530(a)(1)(A),34 FINRA notes that
proposed Supplementary Material .02,
which states that FINRA Rule
4530(a)(1)(A) is limited to situations
where there has been a finding of
violative conduct by an external body,
such as a court, domestic or foreign
regulatory body, SRO or business or
professional organization.35
B. Civil Litigation or Arbitration and
Other Claims for Damages Under
Proposed FINRA Rule 4350(a)(1)(G)
Proposed Rule 4530(a)(1)(G) requires
that members report any ‘‘insurance’’
civil litigation or arbitration that is
‘‘financial-related.’’ Three commenters
opined that the term ‘‘financial-related’’
is ambiguous and needs greater
clarification.36 In response, FINRA
amended its proposal to add
Supplementary Material .09, which
defines the term ‘‘financial-related’’ to
mean ‘‘related to the provision of
financial services.’’ 37
Two commenters believe that the
reporting of insurance-related civil
litigation and arbitration should be
limited to insurance products that are
securities.38 FINRA clarifies that the
proposed rule would exclude civil
litigation and arbitration related to
certain insurance products, such as
traditional auto and health insurance,
but would include civil litigation and
arbitration involving non-securities
insurance products related to the
provision of financial services.39 FINRA
defendant or respondent in any proceeding brought
by a regulatory or self-regulatory body alleging the
violation of any insurance laws, rules or
regulations), NASD Rule 3070(a)(4) and NYSE Rule
351(a)(4) (requiring reporting where a firm or an
associated person is disciplined by any insurance
regulatory or self-regulatory body, is denied
membership or continued membership in any such
self-regulatory body, or is barred from becoming
associated with any member of any such selfregulatory body), and NASD Rule 3070(a)(6) and
NYSE Rule 351(a)(6) (requiring reporting where a
firm or an associated person is a director,
controlling stockholder, partner, officer, sole
proprietor, or an associated person of an insurance
company that was suspended, expelled or had its
registration denied or revoked).
33 Id.
34 See NSCP Letter.
35 See Amendment No. 1 at 7–8.
36 See CAI Letter, NSCP Letter and State Farm
Letter.
37 See proposed FINRA Rule 4530.09.
38 See CAI Letter and NSCP Letter.
39 See Amendment No. 1 at 8.
PO 00000
Frm 00116
Fmt 4703
Sfmt 4703
69511
does not believe that the proposed rule
should be limited to insurance products
that are securities.40
As initially proposed, proposed Rule
4530(a)(1)(G) required the reporting of
claims for damages by customers that
were ‘‘financial or transactional in
nature.’’ 41 Two commenters requested
further clarification to effectively
identify and report insurance matters
relevant to FINRA.42 In response to
these comments, FINRA revised the
language of proposed Rule 4530(a)(1)(G)
to require reporting of any claim for
damages that relates to the provision of
financial services or relates to a
financial transaction.43
C. Reporting of Internal Conclusions
Under Proposed FINRA Rule 4530(b)
Proposed FINRA Rule 4350(b)
requires members to report to FINRA
certain internal conclusions of violative
conduct.44 As initially proposed,
Supplementary Material .01 stated that
FINRA Rule 4530(b) would not require
a member to report an isolated violation
by the member or an associated person
of the member that could be reasonably
viewed as a ministerial violation that
did not result in customer harm and was
remedied promptly upon discovery.45
Four commenters argued that the
provisions of proposed FINRA Rules
4530(b) and Supplementary Material .01
are unduly burdensome, overly broad
and costly,46 and two requested
elimination of the reporting
requirement.47 In response, FINRA
notes that NYSE Rule 351(a)(1) requires
firms to report internal conclusions of
violative conduct and that FINRA’s
examination programs use this
information as part of their assessment
processes and risk-based analyses.48
All commenters believe that the
requirements of proposed FINRA Rule
4530(b) and the language in
Supplementary Material .01 are vague
and that FINRA should clarify and
provide examples of what internal
conclusions are required to be
reported.49 Some of these commenters
suggest that FINRA should adopt the
reporting standard and interpretive
guidance set forth in NYSE Information
40 Id.
41 See
Notice, supra note 3, 75 FR at 47864.
NSCP Letter and State Farm Letter.
proposed FINRA Rule 4350(a)(1)(G), as
modified by Amendment No. 1.
44 See proposed FINRA Rule 4350(b).
45 See Notice, supra note 3, 75 FR at 47865.
46 See CAI Letter, Commonwealth Letter and
NSCP Letter.
47 See CAI Letter and State Farm Letter.
48 See Amendment No. 1 at 10.
49 See CAI Letter, Commonwealth Letter, FSI
Letter, NSCP Letter, PFS Letter, SIFMA Letter and
FSI Letter.
42 See
43 See
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Federal Register / Vol. 75, No. 218 / Friday, November 12, 2010 / Notices
mstockstill on DSKH9S0YB1PROD with NOTICES
Memorandum 06–11.50 In response to
these comments, FINRA noted that it
continues to believe the standard set
forth in NYSE Information
Memorandum 06–11 is too narrow 51
but amended Supplementary Material
.01 to further clarify what internal
conclusions of violative conduct FINRA
expects a member to report.52
Two commenters believe that the term
‘‘concluded’’ is vague.53 FINRA responds
that a firm is free to determine the
persons responsible for concluding that
a violation has occurred. FINRA stated
that a firm cannot defend against a
failure to report such conduct by
asserting that the conduct was of a
nature that did not merit consideration
by a person of seniority.54 In addition,
FINRA notes that if someone within a
firm reaches a conclusion of violation,
but upon review, senior management
reaches a different conclusion, a firm
could rely on senior management’s
determination, provided it is
reasonable.55
A number of commenters took issue
with the requirement to report violative
conduct pursuant to proposed FINRA
Rule 4350(b) if a member ‘‘reasonably
should have concluded’’ a violation
occurred, arguing it will create
uncertainty, result in inconsistent
application, and could be used in
hindsight by FINRA to pursue a firm if
FINRA concludes after-the-fact that the
firm should have reported.56 In
response, FINRA clarifies that if a
reasonable person would have
concluded that a violation occurred,
then the matter is reportable, and if a
reasonable person would not have
concluded that a violation occurred,
then the matter is not reportable; FINRA
will rely on a firm’s good-faith
reasonable determination.57
Numerous commenters expressed
concern that FINRA’s statement that the
existence of internal audit findings
creates a strong presumption that a
matter is reportable 58 could undermine
the internal audit process at member
firms.59 Similarly, commenters believe
FINRA’s statement 60 that matters
subject to a firm’s internal review
processes as required under other
FINRA rules are subject to being
reported as internal conclusions under
proposed FINRA Rule 4530(b) could be
problematic.61 One commenter believes
this could result in firms diluting their
internal control findings.62 Two
commenters point out that this runs
counter to previous guidance by NASD
that it would not use the reports and
review processes contemplated by
NASD Rules 3012 and 3013 as a
roadmap for disciplinary action against
firms.63 FINRA responds that the
reporting obligation under proposed
FINRA Rule 4350(b) and the internal
review processes set forth under other
rules (e.g., FINRA Rule 3130) are
mutually exclusive and that, while
internal review processes may inform a
member’s determination that a violation
occurred, they do not by themselves
lead to the conclusion that a matter is
reportable under proposed FINRA Rule
4350(b).64 FINRA notes that it would
not view a discussion in an internal
audit report regarding the need for
enhanced controls in a particular area
alone as determinative of a reportable
violation under proposed FINRA Rule
4350(b).65 FINRA also clarifies that,
rather than creating a strong
presumption, an internal audit finding
would serve only as one factor, among
others, that a firm should consider in
determining whether violative conduct
occurred.66 Furthermore, FINRA has
stated that it believes that the goals of
customer protection and market
integrity necessitate the reporting of
such conduct to FINRA.67
50 See CAI Letter, Commonwealth Letter, FSI
Letter and PFS Letter.
51 Id. at 15.
52 See proposed FINRA Rule 4350.01, as modified
by Amendment No. 1.
53 See NSCP Letter and State Farm Letter.
54 See Amendment No. 1 at 11.
55 See Amendment No. 1 at 11–12.
56 See CAI Letter, Commonwealth Letter, FSI
Letter, NSCP Letter and SIFMA Letter.
57 See Amendment No. 1 at 13.
58 See Notice, supra note 3, 75 FR at 47867.
59 See Commonwealth Letter, NSCP Letter and
SIFMA Letter.
60 See Notice, supra note 3, 75 FR at 47867.
61 See CAI Letter, Commonwealth Letter and
SIFMA Letter.
62 See SIFMA Letter.
63 See CAI Letter and Commonwealth Letter.
64 See Amendment No. 1 at 14–15.
65 See Amendment No. 1 at 15.
66 Id.
67 See Notice, supra note 3, 75 FR at 47867.
68 See Notice, supra note 3, 75 FR at 47868.
Proposed Supplementary Material .08 defines
‘‘customer’’ as any person, other than a broker or
dealer, with whom a member has engaged, or has
sought to engage, in securities activities. This
definition is identical to the definition of
‘‘customer’’ contained in NASD Rule 3070(c).
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D. Customer Complaints
Proposed FINRA Rule 4530(d)
requires members to submit monthly
reports to FINRA regarding written
customer complaints received by the
member. A member would not be
required to report written complaints
relating to non-securities products, if
such complaints are not from customers
that the member has engaged, or has
sought to engage, in securities
activities.68 If a member has engaged, or
has sought to engage, in securities
PO 00000
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Fmt 4703
Sfmt 4703
activities with a person, then any
written complaint from that person is
reportable, regardless of whether it
relates to non-securities products.69 One
commenter stated that it would be
difficult to determine with whom a firm
has ‘‘sought to engage’’ in securities
activities, and also expressed concern
regarding the potential number of nonsecurities related complaints it would
have to report in connection with
customers it ‘‘sought to engage’’ in
securities activities.70 In response,
FINRA notes that the definition of
‘‘customer’’ under NASD Rule 3070(c)
includes persons with whom a member
has ‘‘sought to engage’’ in securities
activities and, therefore, firms should
currently have procedures to identify
whether a person submitting a written
complaint is someone that the firm has
sought to engage in securities activities.
In addition, FINRA amended proposed
Supplementary Material .08 to clarify
circumstances under which a member
would be required to report, pursuant to
proposed FINRA Rules 4530(d) and
4530(a)(1)(B), complaints from persons
with whom the member has engaged in
securities activities versus persons with
whom the member has sought to engage
in securities activities.71
E. Duplicative Reporting
Three commenters believe that FINRA
should completely eliminate duplicative
reporting requirements under proposed
FINRA Rule 4530(e) and Forms U4, U5
and BD.72 FINRA responds that it will
work toward this goal and that proposed
FINRA Rule 4530(e) will eliminate
duplicative reporting of information
disclosed on the Form U5.73
F. Former Associated Persons
Two commenters argued that the
requirement to report certain events
related to former associated persons
would be unduly burdensome and
recommend that the requirement be
amended to conform to the record
retention requirements of Rule 17a–4 of
the Act 74 and the reporting period for
formerly associated persons be capped
at three years.75 In response, FINRA
revised proposed Supplementary
Material .07 to state that a firm is not
required to report information with
respect to a former associated person
where, based on its records or
information available through Web CRD,
69 Id.
70 See
State Farm Letter.
proposed FINRA Rule 4530.08, as modified
by Amendment No. 1.
72 See CAI Letter, FSI Letter and SIFMA Letter.
73 See Amendment No. 1 at 18.
74 17 CFR 240.17a–4.
75 See CAI Letter and FSI Letter.
71 See
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Federal Register / Vol. 75, No. 218 / Friday, November 12, 2010 / Notices
the member cannot determine whether
the person was an associated person.76
G. Other Comments
One commenter urges the
Commission to reject the rule and
require FINRA to provide a detailed
analysis to support its claim that the
proposed rule will advance customer
protection and market integrity without
placing an undue burden on firms.77
FINRA responds that the proposed rule
change would enhance FINRA’s ability
to detect and investigate violative
conduct.
One commenter argues that the
current dollar thresholds in the rule that
trigger a reporting obligation are too low
and outdated.78 While FINRA does not
address this comment in Amendment
No. 1, FINRA previously responded that
it believes the current dollar thresholds
in proposed FINRA Rule 4350 continue
to be consistent with the purposes of the
rule, and that the $ 15,000 reporting
threshold for an associated person is
consistent with the Forms U4 and U5
current reporting thresholds.79
Two commenters argue that FINRA
does not have the jurisdiction to require
firms to report information required
under the proposed rule, such as
matters relating to insurance laws and
commodities laws.80 As discussed
above, FINRA notes that the
requirement to report insurance matters
is consistent with other provisions of
the current rules and that this
information is relevant to FINRA’s
programs as it assists FINRA in
identifying members and associated
persons that may pose a regulatory
risk.81
mstockstill on DSKH9S0YB1PROD with NOTICES
IV. Discussion and Commission
Findings
After carefully reviewing the
proposed rule change, the comment
letters, and FINRA’s response, 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.82 In particular, the
Commission finds that the proposed
rule change is consistent with Section
V. Accelerated Approval
76 See proposed FINRA Rule 4530.07, as modified
by Amendments No. 1 and 2, which applies only
if a firm has kept its records in accordance with
Rule 17a–4(e)(1) of the Act.
77 See PFS Letter.
78 See FSI Letter.
79 See Notice, supra note 3, 75 FR at 47867.
80 See CAI Letter and FSI Letter.
81 See supra notes 32–33 and accompanying text.
82 In approving this proposed rule change, the
Commission has considered the proposed rule
change’s impact on efficiency, competition, and
capital formation. See 15 U.S.C. 78c(f).
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17:23 Nov 10, 2010
Jkt 223001
15A(b)(6) of the Act,83 which requires,
among other things, that FINRA’s rules
be designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest. The
proposed rule change is consistent with
FINRA’s statutory obligations under the
Act to protect investors and the public
interest because it would enhance
FINRA’s ability to detect and investigate
violative conduct and to identify
members and associated persons of
member firms that may pose a
regulatory risk. The proposed rule
change streamlines the rules governing
reporting requirements in NASD Rule
3070 and Incorporated NYSE Rule 351
while maintaining the disclosure
requirements in Incorporated NYSE
Rule 351(a)(1) relating to internal
conclusions.
The Commission believes that the
changes made in Amendments No. 1
and 2 should provide greater clarity to
members regarding when a reporting
requirement arises pursuant to proposed
FINRA Rule 4350 and the types of
external findings, internal conclusions
and customer complaints that must be
reported. The Commission believes the
proposed rule further strengthens
FINRA’s ability to effectively detect
violative conduct by members and
associated persons and protect
investors. Further, as the proposed rule
change consolidates the NYSE and
NASD reporting requirement rules into
one rule in the Consolidated FINRA
Rulebook, it should simplify reporting
requirements for broker-dealers and
their associated persons.
The Commission finds good cause,
pursuant to Section 19(b)(2) of the
Act,84 for approving the proposed rule
change, as amended, prior to the 30th
day after publication of Amendments
No. 1 and 2 in the Federal Register. The
changes proposed in Amendments No. 1
and 2 respond to specific concerns
raised by commenters and do not raise
additional issues. The rule change
should enhance FINRA’s ability to
oversee the conduct of its members and
their associated persons, which should
further investor protection and the
public interest. Accordingly, the
Commission finds that good cause exists
to approve the proposal, as modified by
83 15
84 15
PO 00000
U.S.C. 78o–3(b)(6).
U.S.C. 78s(b)(2).
Frm 00118
Fmt 4703
Sfmt 4703
69513
Amendments No. 1 and 2, on an
accelerated basis.
VI. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether Amendments No. 1
and 2 to the proposed rule change are
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 rulecomments@sec.gov. Please include File
Number SR–FINRA–2010–039 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–2010–034. 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 website viewing and
printing 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 filings
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–2010–034 and
should be submitted on or before
December 3, 2010.
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Federal Register / Vol. 75, No. 218 / Friday, November 12, 2010 / Notices
VII. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,85 that the
proposed rule change (SR–FINRA–
2010–034), as modified by Amendments
No. 1 and 2, be, and hereby is, approved
on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.86
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–28444 Filed 11–10–10; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63254; File No. SR–DTC–
2010–14]
Self-Regulatory Organizations; The
Depository Trust Company; Notice of
Filing of Proposed Rule Change To
Amend the Certificate of Organization
To Authorize Additional Shares of
Preferred Stock and Designate Shares
as Series A Preferred Stock
November 5, 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 October
22, 2010, The Depository Trust
Company (‘‘DTC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
primarily by DTC.3 The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
mstockstill on DSKH9S0YB1PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The purpose of this proposed rule
change is to amend DTC’s Certificate of
Organization to authorize an additional
1,750,000 shares of preferred stock and
to designate such shares as Series A
preferred stock.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
DTC included statements concerning
85 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 The text of the proposed rule change is attached
as Exhibit 5 to DTC’s filing, which is available at
https://www.dtcc.com/downloads/legal/rule_filings/
2010/dtc/2010-14.pdf.
86 17
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17:23 Nov 10, 2010
Jkt 223001
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. DTC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.4
(A) Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In 1999, DTC’s Certificate of
Organization was amended (‘‘1999
Amendment’’) to provide for the
authorization and issuance of 1,500,000
shares of preferred stock, par value $100
per share.5 The 1999 Amendment also
provided that the preferred stock could
be issued in one or more classes having
such designations, relative rights,
preferences, or limitation as fixed by the
Board of Directors of DTC at the time of
issuance of any such preferred stock.
DTC’s Certificate of Organization has
been amended three times thereafter to
provide for the issuance of variable rate,
noncumulative, nonvoting shares of
Series A preferred stock, par value $100
per share, which are preferred over
DTC’s common stock as to dividends
and in the event of liquidation (‘‘Series
A Preferred Stock’’). The first such
amendment (filed in 2000) provided for
the issuance of 750,000 shares of the
Series A Preferred Stock. The second
amendment (filed in 2006) provided for
the issuance of an additional 500,000
shares of Series A Preferred Stock. The
third amendment (filed in 2009)
provided for the issuance of an
additional 250,000 shares of Series A
Preferred Stock.6
DTC participants are required to
purchase and own shares of the Series
A Preferred Stock in proportion to their
use of DTC services. DTC treats the
Series A Preferred Stock held by
participants substantially the same as it
treats the mandatory cash deposits made
by participants to the Participants Fund
for purposes of collateralizing securities
transactions, limiting net debit
4 The Commission has modified the text of the
summaries prepared by NSCC.
5 The amendment was the subject of a DTC
proposed rule change approved by the Commission.
Securities Exchange Act No. 34–41529 (June 15,
1999), 64 FR 33333 (June 22, 1999) [File No. SR–
DTC–1999–08]. The amendment was also approved
by the New York State Superintendent of Banks.
6 Securities Exchange Release Nos. 34–43197
(August 23, 2000), 65 FR 52459 (August 29, 2000)
[File No. SR–DTC–2000–02]; 34–54775 (November
17, 2006), 71 FR 68662 (November 27, 2006) [SR–
DTC–2006–14]; 34–59612 (March 20, 2009), 74 FR
13488 (March 27, 2009) [File No. SR–DTC–2009–
06].
PO 00000
Frm 00119
Fmt 4703
Sfmt 4703
positions, implementing default
procedures, and allocating unrecovered
losses.
In order that DTC may further
increase its capital,7 DTC is proposing
to amend its Certificate of Organization 8
to authorize an additional 1,750,000
shares of preferred stock at the par value
of $100 per share and to designate such
shares as Series A Preferred Stock with
such rights, preferences, and limitations
as provided in its Certificate of
Organization.9
The proposed rule change is
consistent with the requirements of the
Securities Exchange Act of 1934, as
amended, (‘‘Act’’) and the rules and
regulations thereunder applicable to
DTC, as well as CPSS/IOSCO
Recommendations for Securities
Settlement Systems applicable to DTC
because the proposed rule change will
not affect the safeguarding of securities
and funds in DTC’s custody or control
or for which it is responsible.
(B) Self-Regulatory Organization’s
Statement on Burden on Competition
DTC does not believe that the
proposed rule change would impose any
burden on competition.
(C) Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
Written comments relating to the
proposed rule change have not been
solicited or received. DTC will notify
the Commission of any written
comments received by DTC.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within forty-five days of the date of
publication of this notice in the Federal
7 DTC, as a member institution of the Federal
Reserve System, is subject to capital guidelines
issued by the Board of Governors of the Federal
Reserve System. To be considered ‘‘wellcapitalized’’ under these guidelines, DTC must,
among other things, maintain a Total Risk-Based
Capital Ratio of at least 10%, a Leverage Ratio of
at least 5%, and a Tier 1 Risk-Based Capital Ratio
of at least 6%. The issuance of the additional Series
A preferred stock will enable DTC to continue to
meet these requirements.
8 In order to amend its Certificate of Organization
to increase the authorized preferred stock, DTC is
also required to seek approval from the New York
State Banking Department. DTC has sought such
approval concurrently with this rule filing. On
October 20, 2010, DTC’s sole stockholder, The
Depository Trust & Clearing Corporation,
authorized DTC to make this amendment, as
required by Section 8003 of the Banking Law of the
State of New York.
9 The authorization of an additional 1,750,000
shares will increase the number of authorized
shares of Preferred Stock and of Series A Preferred
stock to a total of 3,250,000 shares with a par value
of $100 per share and a total value of $325 million.
E:\FR\FM\12NON1.SGM
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]]>Agencies
[Federal Register Volume 75, Number 218 (Friday, November 12, 2010)]
[Notices]
[Pages 69508-69514]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-28444]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63260; File No. SR-FINRA-2010-034]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filings of Amendments No. 1 and 2 and Order
Granting Accelerated Approval of a Proposed Rule Change, as Amended, To
Adopt FINRA Rule 4530 (Reporting Requirements) in the Consolidated
FINRA Rulebook
November 5, 2010.
I. Introduction
On July 30, 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 (i) adopt NASD Rule 3070 (Reporting Requirements) as FINRA
Rule 4530 in the Consolidated FINRA Rulebook, with certain amendments
and the addition of a supplementary material section, and (ii) delete
paragraphs (a) through (d) of Incorporated NYSE Rule 351 and
Incorporated NYSE Rules 351.10 and 351.13. The proposal was published
for comment in the Federal Register on August 9, 2010.\3\ The
Commission received seven comments on the proposal.\4\ On October 18,
2010, FINRA
[[Page 69509]]
responded to the comments and filed Amendment No. 1 to the proposed
rule change.\5\ On October 22, 2010, FINRA filed Amendment No. 2 to the
proposed rule change.\6\ The Commission is publishing this notice and
order to solicit comments on Amendments No. 1 and 2 and to approve the
proposed rule change, as amended, on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 62621 (July 30,
2010), 75 FR 47863 (August 9, 2010) (``Notice'').
\4\ See letter from Brendan Daly, Legal and Compliance Counsel,
Commonwealth Financial Network, to Elizabeth M. Murphy, Secretary,
Commission, dated August 27, 2010 (``Commonwealth Letter''); letter
from Kristin Bulls, Products and Broker-Dealer Compliance Director,
State Farm VP Management Corp., to Elizabeth M. Murphy, Secretary,
Commission, dated August 30, 2010 (``State Farm Letter''); letter
from Joan Hinchman, Executive Director, President and CEO, National
Society of Compliance Professionals, to Elizabeth M. Murphy,
Secretary, Commission, dated August 30, 2010 (``NSCP Letter'');
letter from Clifford E. Kirsch and Susan S. Krawczyk, Sutherland
Asbill & Brennan LLP, on behalf of the Committee of Annuity
Insurers, to Elizabeth M. Murphy, Secretary, Commission, dated
August 30, 2010 (``CAI Letter''); letter from Michael Lesutis,
Assistant General Counsel, PFS Investments, Inc., to Elizabeth M.
Murphy, Secretary, Commission, dated September 1, 2010 (``PFS
Letter''); letter from James T. McHale, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association, to Elizabeth M. Murphy, Secretary, Commission, dated
September 1, 2010 (``SIFMA Letter''); letter from Dale E. Brown,
President and CEO, Financial Services Institute, to Elizabeth M.
Murphy, Secretary, Commission, dated September 15, 2010 (``FSI
Letter'').
\5\ See Amendment No. 1, dated October 18, 2010 (``Amendment No.
1''). The text of Amendment No. 1 is available on FINRA's Web site
at https://www.finra.org, at the principal office of FINRA, and on
the Commission's Web site, https://www.sec.gov/rules/sro.shtml. In
Amendment No. 1, FINRA responded to the comment letters received
regarding the Notice and revised the proposed rule change. Among
other things, FINRA proposes to amend (i) proposed FINRA Rule
4530(a)(1)(G) to require the reporting of any claims for damages by
a customer, broker or dealer that relates to the provision of
financial services or relates to a financial transaction; (ii)
proposed Supplementary Material .01 to provide clarity on what
internal conclusions of violative conduct a member must report
pursuant to proposed FINRA Rule 4530(b); (iii) proposed
Supplementary Material .07 to clarify the circumstances under which
a firm would not be required to report information relating to a
former associated person; (iv) proposed Supplementary Material .08
to clarify a member's reporting obligations regarding customer
complaints pursuant to proposed FINRA Rules 4530(a)(1)(B) and
4530(d); and (v) proposed Supplementary Material .09 to provide a
definition for the term ``financial-related.''
\6\ See Amendment No. 2 dated October 22, 2010 (``Amendment No.
2''). The text of Amendment No. 2 is available on FINRA's Web site
at https://www.finra.org, at the principal office of FINRA, and on
the Commission's Web site, https://www.sec.gov/rules/sro.shtml. In
Amendment No. 2, FINRA proposes to further amend proposed
Supplementary Material .07 to clarify the circumstances under which
a firm would not be required to report information relating to a
former associated person.
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II. Description of the Proposal, as Modified by Amendments No. 1 and 2
As part of the process of developing a new consolidated rulebook
(``Consolidated FINRA Rulebook''), FINRA proposes to (i) adopt NASD
Rule 3070 (Reporting Requirements) as FINRA Rule 4530 in the
Consolidated FINRA Rulebook, subject to certain amendments described
below and the addition of a supplementary material section as detailed
below and (ii) delete paragraphs (a) through (d) of Incorporated NYSE
Rule 351 and Incorporated NYSE Rules 351.10 and 351.13 from the
Transitional Rulebook.
NASD Rule 3070 and Incorporated NYSE Rule 351 require members to
report to FINRA certain specified events (e.g., regulatory actions,
certain customer settlements, securities-related law suits or
arbitrations, etc.), to file with FINRA documents related to such
events, and to report to FINRA quarterly statistical and summary
information regarding written customer complaints. FINRA uses the
reported information for regulatory purposes; the information, among
other things, assists FINRA in identifying and investigating firms,
offices and associated persons that may pose a regulatory risk.\7\
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\7\ See Notice, supra note 3, 75 FR at 47863.
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Because proposed FINRA Rule 4530 is based upon NASD Rule 3070, the
following description sets forth a summary of the ways in which
proposed FINRA Rule 4530 differs from NASD Rule 3070.
A. Reporting Deadline (Proposed FINRA Rules 4530(a) and 4530.03)
The substantive changes to proposed FINRA Rule 4530(a) clarify that
a firm must report to FINRA after the firm ``knows or should have
known'' of the existence of any of the events specified in paragraph
(a) of the proposed rule and extends the time period for reporting the
events from 10 business days (as provided under NASD Rule 3070(b)) to
no later than 30 calendar days after the firm knows or should have
known of the event. FINRA states that the proposed 30-calendar-day
reporting deadline is consistent with Incorporated NYSE Rule 351 \8\
and the reporting deadlines for disclosing information on forms BD
(Uniform Application for Broker-Dealer Registration),\9\ U4 (Uniform
Application for Securities Industry Registration or Transfer) \10\ and
U5 (Uniform Termination Notice for Securities Industry Registration)
\11\ (collectively referred to as the ``Uniform Forms'').
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\8\ See Incorporated NYSE Rule 351(b); NYSE Information Memo 90-
17, ``Timely and Complete Filings and Responses to Enforcement
Inquiries'' (April 30, 1990) (defining ``prompt'' filing as
occurring within 30 days of the reportable event).
\9\ See Article IV, Section 1 of FINRA's By-Laws.
\10\ See Article V, Section 2 of FINRA's By-Laws.
\11\ See Article V, Section 3 of FINRA's By-Laws.
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B. External Findings (Proposed FINRA Rule 4530(a)(1)(A))
NASD Rule 3070(a)(1) requires a firm to report findings of
violations of ``any provision of any securities laws, or regulation,
any rule or standards of conduct of any governmental agency, self-
regulatory organization, or financial business or professional
organization.'' Proposed FINRA Rule 4530(a)(1)(A) would instead require
a firm to report findings of violations of any ``securities-,
insurance-, commodities-, financial- or investment-related laws, rules,
regulations or standards of conduct of any domestic or foreign
regulatory body, self-regulatory organization or business or
professional organization'' and eliminates the requirement for firms to
report findings that a member or associated person has engaged in
conduct inconsistent with just and equitable principles of trade.\12\
Proposed Supplementary Material .03 clarifies the meaning of the term
``found'' for the purpose of determining when a firm or associated
person has been ``found to have'' engaged in violative conduct.
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\12\ FINRA members would still be required to report findings of
violations of an SRO's just and equitable principles of trade rule,
such as FINRA Rule 2010. See Notice, supra note 3, 75 FR at 47864.
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C. Civil Litigation or Arbitration; Claims for Damages (Proposed FINRA
Rules 4530(a)(1)(G), 4530.06 and 4530.09)
As proposed, FINRA Rule 4530(a)(1)(G) extends the reporting
requirement relating to securities- and commodities-related civil suits
and arbitrations and claims for damages by customers and broker-dealers
disposed of by judgment, award or settlement (in an amount exceeding
certain monetary thresholds) to include ``any financial-related
insurance civil litigation or arbitration'' but limits the requirement
to report claims for damages by customers, brokers or dealers to those
claims for damages that relate to the provision of financial services
or a financial transaction.\13\ Proposed Supplemental Material .06
clarifies that for purposes of determining whether a civil suit,
arbitration or claim for damages exceeds the monetary threshold and
must be reported pursuant to proposed FINRA Rule 4530(a)(1)(G), (1)
members must take into account awards of attorneys fees and interest,
and (2) if parties are subject to ``joint and several'' liability, each
party is considered separately liable for the aggregate amount.\14\
Proposed Supplemental Material .09 defines the term ``financial
related'' to mean ``related to the provision of financial services.''
\15\
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\13\ See proposed FINRA Rule 4530(a)(1)(G), as modified by
Amendment No. 1.
\14\ See proposed FINRA Rule 4530.06.
\15\ See proposed FINRA Rule 4530.09, as modified by Amendment
No. 1.
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D. Statutory Disqualifications (Proposed FINRA Rule 4530(a)(1)(H))
Proposed FINRA Rule 4530(a)(1)(H) modifies the reporting
requirement in NASD Rule 3070(a)(9) relating to statutory
disqualifications to clarify that a member must report to FINRA
whenever the member itself is subject to a ``statutory
disqualification,'' or whenever an associated person of the firm is
subject to a ``statutory disqualification.'' While NASD Rule 3070(a)(9)
requires a member to report to FINRA if the member or an associated
person of the member ``is associated in any business or financial
activity'' with a person subject to a ``statutory
[[Page 69510]]
disqualification,'' proposed FINRA Rule 4530(a)(1)(H) instead requires
a member to report to FINRA whenever the member or an associated person
of the member ``is involved in the sale of any financial instrument,
the provision of any investment advice or the financing of any such
activities'' with a person subject to a ``statutory disqualification.''
\16\
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\16\ FINRA notes that this provision is consistent with
Incorporated NYSE Rule 351(a)(9). See Notice, supra note 3, 75 FR at
47864.
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E. Internal Disciplinary Actions Against Associated Persons (Proposed
FINRA Rule 4530(a)(2))
Similar to NASD Rule 3070(a)(10), proposed FINRA Rule 4530(a)(2)
requires a firm to report certain disciplinary actions taken by the
firm against its associated persons. Proposed FINRA Rule 4530(a)(2)
states that disciplinary actions involving the withholding of
compensation or of any other remuneration in excess of $2,500 are
reportable events (as opposed to just the withholding of commissions,
as provided by NASD Rule 3070(a)(10)).
F. Internal Conclusions (Proposed FINRA Rules 4530(b), 4530.01 and
4530.02)
Proposed FINRA Rule 4530(b) requires firms to report internal
conclusions of certain enumerated violative conduct.\17\ Specifically,
a firm would be required to report to FINRA no later than 30 calendar
days after the firm has concluded, or reasonably should have concluded,
that an associated person of the firm or the firm itself has violated
any securities-, insurance-, commodities-, financial- or investment-
related laws, rules, regulations or standards of conduct of any
domestic or foreign regulatory body or SRO.
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\17\ FINRA notes that this proposed rule is generally based on
Incorporated NYSE Rule 351(a)(1), which requires a firm to report
whenever it or its associated persons have violated any provision of
any securities law or regulation, any agreement with or rule or
standard of conduct of any governmental agency, self-regulatory
organization (``SRO''), or business or professional organization, or
engaged in conduct that is inconsistent with just and equitable
principles of trade or detrimental to the interests or welfare of
the NYSE. See Notice, supra note 3, 75 FR at 47864.
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Pursuant to proposed Supplementary Material .01, if a firm
disciplines an associated person in the manner described in proposed
FINRA Rule 4530(a)(2), the firm would be required to report the event
under proposed FINRA Rule 4530(a)(2).\18\ In addition, proposed
Supplementary Material .01 clarifies that FINRA only expects a member
to report internal conclusions pursuant to proposed FINRA Rule 4530(b)
relating to violative conduct that has widespread or potentially
widespread effect on the member, its customers or markets, or, in the
case of violative conduct of the member, that arises from a material
failure of the member's systems, policies or practices involving
numerous customers, multiple errors or significant dollar amounts, or,
in the case of violative conduct by an associated person, has a
significant monetary result with respect to a member(s), customer(s) or
market(s) or where there are multiple instances of any violative
conduct.\19\
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\18\ See proposed FINRA Rule 4530.01, as modified by Amendment
No. 1.
\19\ Id.
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In addition, proposed Supplementary Material .02 states that
proposed FINRA Rule 4530(b) only requires reporting where a member has
concluded or reasonably should have concluded on its own that violative
conduct has occurred, as opposed to where there has been a finding of
violative conduct by an external body, such as a court, domestic or
foreign regulatory body, SRO or business or professional organization
(which would be reportable pursuant to proposed FINRA Rule
4530(a)(1)(A)).\20\
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\20\ See proposed FINRA Rule 4530.02.
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G. Reporting Obligation (Proposed FINRA Rule 4530(e))
Similar to NASD Rule 3070(d), proposed FINRA Rule 4530(e) provides
that proposed FINRA Rule 4530 does not relieve a firm or an associated
person from other obligations, such as the requirement to disclose
information on the Uniform Forms, as applicable. In addition, proposed
FINRA Rule 4530(e) clarifies that a firm must comply with the reporting
obligations under proposed FINRA Rules 4530(a) and (b) and must report
quarterly statistical and summary information regarding written
customer complaints pursuant to proposed FINRA Rule 4530(d), regardless
of whether such information is reported or disclosed pursuant to any
other rule or requirement, including the requirements of the Forms BD
or U4.\21\
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\21\ Proposed FINRA Rule 4530(e) provides that a firm is not
required to report an event otherwise required to be reported under
proposed FINRA Rules 4530(a) or (b) if the firm discloses the event
on a Form U5, consistent with the requirements of that form.
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H. Elimination of the Exemption for Dual Members Subject to Another
SRO's Rule
Proposed FINRA Rule 4530 does not include the exemption set forth
in NASD Rule 3070(e) for firms subject to substantially similar
reporting requirements of another SRO because this provision was
intended to exempt Dual Members subject to the reporting requirements
of NASD Rule 3070 and the reporting requirements of Incorporated NYSE
Rule 351.\22\
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\22\ See Notice, supra note 3, 75 FR at 47865.
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I. Filing of Related Documents With FINRA (Proposed FINRA Rule 4530(f))
Consistent with NASD Rule 3070(f), proposed FINRA Rule 4530(f)
requires a firm to file copies of certain criminal and civil complaints
and arbitration claims with FINRA. However, proposed FINRA Rule 4530(f)
expands the filing requirement to include (1) copies of any complaint
in which a member is named as a defendant or respondent in any
``financial-related insurance private civil litigation'' and (2) any
``financial-related insurance arbitration claim'' filed against a
member in any forum other than the FINRA Dispute Resolution forum.
J. Additional Supplementary Material (Proposed FINRA Rules 4530.05, .07
and .08)
In addition to the supplementary material discussed above, FINRA
also proposes as supplementary material the following clarifications:
(1) For purposes of proposed FINRA Rules 4530(a) and (b), firms should
not report a single event under more than one paragraph or
subparagraph; however, members may be required to report related events
under more than one paragraph or subparagraph; \23\ (2) for purposes of
proposed FINRA Rules 4530(a), (b) and (d), firms should report an event
relating to a former associated person if the event occurred while the
individual was associated with the member; however, a member is not
required to report such an event where, based on its records or
information available through Web CRD, the member cannot determine that
the person was an associated person of the member; \24\ and (3) any
written customer complaint reported under proposed FINRA Rule
4530(a)(1)(B) must also be reported pursuant to proposed FINRA Rule
4350(d); \25\ however, for the purpose of reporting under proposed
FINRA Rule 4350(d), a member must report (1) any written grievance
involving the member or its associated person by a person,
[[Page 69511]]
other than a broker or dealer, with whom the member has engaged in
securities activities and (2) any securities-related written grievance
involving the member or its associated person and any written complaint
reportable under proposed Rule 4530(a)(1)(B) by a person other than a
broker or dealer, with whom the member has sought to engage in
securities activities.\26\
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\23\ See proposed FINRA Rule 4530.05.
\24\ See proposed FINRA Rule 4530.07.
\25\ Proposed FINRA Rule 4530(a)(1)(B) is identical to NASD Rule
3070(a)(2) and requires a member to report to FINRA if the member or
an associated person of the member is the subject of any written
customer complaint involving allegations of theft or
misappropriation of funds or securities or of forgery.
\26\ See proposed FINRA Rule 4530.08.
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K. Deletion of Certain Incorporated NYSE Provisions
FINRA proposes to delete paragraphs (a) through (d) of Incorporated
NYSE Rule 351 and NYSE Rules 351.10 and 351.13 because these provisions
are substantially similar to, otherwise incorporated in, or rendered
obsolete by proposed FINRA Rule 4530, or addressed by other rules.\27\
---------------------------------------------------------------------------
\27\ See Notice, supra note 3, 75 FR at 47866.
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III. Summary of Comments and FINRA's Response
The Commission received seven comment letters to the proposed rule
change.\28\ FINRA responded to the comments and modified the proposed
rule change in Amendments No. 1 and 2.
---------------------------------------------------------------------------
\28\ See supra, note 4.
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A. Reporting of Insurance-Related External Findings Under Proposed
FINRA Rule 4530(a)(1)(A)
FINRA Rule 4350(a)(1)(A) requires members to report, among other
things, external findings of violations of insurance-related laws,
rules, or regulations. One commenter believes that the requirement to
report insurance-related external findings is unwarranted, burdensome,
and outside the scope of FINRA's authority.\29\ The commenter argues
that reportable external findings should be limited to those that
derive from a transaction with a customer.\30\ FINRA responds that
current NASD Rule 3070(a)(1) requires a member to report external
findings relating to violations of any rule or standard of conduct of
any governmental agency, SRO, or financial business or professional
organization.\31\ Therefore, members are currently required to report
external findings related to insurance matters and the proposed rule
simply continues this requirement and is consistent with other
provisions of FINRA's rules.\32\ Finally, FINRA states that this
information is relevant because it assists FINRA in identifying members
and associated persons that may pose a regulatory risk.\33\
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\29\ See State Farm Letter.
\30\ Id.
\31\ See Amendment No. 1 at 7.
\32\ Id. FINRA points to NASD Rule 3070(a)(3) and NYSE Rule
351(a)(3) (requiring reporting where a firm or an associated person
is named as a defendant or respondent in any proceeding brought by a
regulatory or self-regulatory body alleging the violation of any
insurance laws, rules or regulations), NASD Rule 3070(a)(4) and NYSE
Rule 351(a)(4) (requiring reporting where a firm or an associated
person is disciplined by any insurance regulatory or self-regulatory
body, is denied membership or continued membership in any such self-
regulatory body, or is barred from becoming associated with any
member of any such self-regulatory body), and NASD Rule 3070(a)(6)
and NYSE Rule 351(a)(6) (requiring reporting where a firm or an
associated person is a director, controlling stockholder, partner,
officer, sole proprietor, or an associated person of an insurance
company that was suspended, expelled or had its registration denied
or revoked).
\33\ Id.
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In response to a comment that FINRA should provide additional
guidance regarding what members should identify and report pursuant to
proposed FINRA Rule 4530(a)(1)(A),\34\ FINRA notes that proposed
Supplementary Material .02, which states that FINRA Rule 4530(a)(1)(A)
is limited to situations where there has been a finding of violative
conduct by an external body, such as a court, domestic or foreign
regulatory body, SRO or business or professional organization.\35\
---------------------------------------------------------------------------
\34\ See NSCP Letter.
\35\ See Amendment No. 1 at 7-8.
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B. Civil Litigation or Arbitration and Other Claims for Damages Under
Proposed FINRA Rule 4350(a)(1)(G)
Proposed Rule 4530(a)(1)(G) requires that members report any
``insurance'' civil litigation or arbitration that is ``financial-
related.'' Three commenters opined that the term ``financial-related''
is ambiguous and needs greater clarification.\36\ In response, FINRA
amended its proposal to add Supplementary Material .09, which defines
the term ``financial-related'' to mean ``related to the provision of
financial services.'' \37\
---------------------------------------------------------------------------
\36\ See CAI Letter, NSCP Letter and State Farm Letter.
\37\ See proposed FINRA Rule 4530.09.
---------------------------------------------------------------------------
Two commenters believe that the reporting of insurance-related
civil litigation and arbitration should be limited to insurance
products that are securities.\38\ FINRA clarifies that the proposed
rule would exclude civil litigation and arbitration related to certain
insurance products, such as traditional auto and health insurance, but
would include civil litigation and arbitration involving non-securities
insurance products related to the provision of financial services.\39\
FINRA does not believe that the proposed rule should be limited to
insurance products that are securities.\40\
---------------------------------------------------------------------------
\38\ See CAI Letter and NSCP Letter.
\39\ See Amendment No. 1 at 8.
\40\ Id.
---------------------------------------------------------------------------
As initially proposed, proposed Rule 4530(a)(1)(G) required the
reporting of claims for damages by customers that were ``financial or
transactional in nature.'' \41\ Two commenters requested further
clarification to effectively identify and report insurance matters
relevant to FINRA.\42\ In response to these comments, FINRA revised the
language of proposed Rule 4530(a)(1)(G) to require reporting of any
claim for damages that relates to the provision of financial services
or relates to a financial transaction.\43\
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\41\ See Notice, supra note 3, 75 FR at 47864.
\42\ See NSCP Letter and State Farm Letter.
\43\ See proposed FINRA Rule 4350(a)(1)(G), as modified by
Amendment No. 1.
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C. Reporting of Internal Conclusions Under Proposed FINRA Rule 4530(b)
Proposed FINRA Rule 4350(b) requires members to report to FINRA
certain internal conclusions of violative conduct.\44\ As initially
proposed, Supplementary Material .01 stated that FINRA Rule 4530(b)
would not require a member to report an isolated violation by the
member or an associated person of the member that could be reasonably
viewed as a ministerial violation that did not result in customer harm
and was remedied promptly upon discovery.\45\
---------------------------------------------------------------------------
\44\ See proposed FINRA Rule 4350(b).
\45\ See Notice, supra note 3, 75 FR at 47865.
---------------------------------------------------------------------------
Four commenters argued that the provisions of proposed FINRA Rules
4530(b) and Supplementary Material .01 are unduly burdensome, overly
broad and costly,\46\ and two requested elimination of the reporting
requirement.\47\ In response, FINRA notes that NYSE Rule 351(a)(1)
requires firms to report internal conclusions of violative conduct and
that FINRA's examination programs use this information as part of their
assessment processes and risk-based analyses.\48\
---------------------------------------------------------------------------
\46\ See CAI Letter, Commonwealth Letter and NSCP Letter.
\47\ See CAI Letter and State Farm Letter.
\48\ See Amendment No. 1 at 10.
---------------------------------------------------------------------------
All commenters believe that the requirements of proposed FINRA Rule
4530(b) and the language in Supplementary Material .01 are vague and
that FINRA should clarify and provide examples of what internal
conclusions are required to be reported.\49\ Some of these commenters
suggest that FINRA should adopt the reporting standard and interpretive
guidance set forth in NYSE Information
[[Page 69512]]
Memorandum 06-11.\50\ In response to these comments, FINRA noted that
it continues to believe the standard set forth in NYSE Information
Memorandum 06-11 is too narrow \51\ but amended Supplementary Material
.01 to further clarify what internal conclusions of violative conduct
FINRA expects a member to report.\52\
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\49\ See CAI Letter, Commonwealth Letter, FSI Letter, NSCP
Letter, PFS Letter, SIFMA Letter and FSI Letter.
\50\ See CAI Letter, Commonwealth Letter, FSI Letter and PFS
Letter.
\51\ Id. at 15.
\52\ See proposed FINRA Rule 4350.01, as modified by Amendment
No. 1.
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Two commenters believe that the term ``concluded'' is vague.\53\
FINRA responds that a firm is free to determine the persons responsible
for concluding that a violation has occurred. FINRA stated that a firm
cannot defend against a failure to report such conduct by asserting
that the conduct was of a nature that did not merit consideration by a
person of seniority.\54\ In addition, FINRA notes that if someone
within a firm reaches a conclusion of violation, but upon review,
senior management reaches a different conclusion, a firm could rely on
senior management's determination, provided it is reasonable.\55\
---------------------------------------------------------------------------
\53\ See NSCP Letter and State Farm Letter.
\54\ See Amendment No. 1 at 11.
\55\ See Amendment No. 1 at 11-12.
---------------------------------------------------------------------------
A number of commenters took issue with the requirement to report
violative conduct pursuant to proposed FINRA Rule 4350(b) if a member
``reasonably should have concluded'' a violation occurred, arguing it
will create uncertainty, result in inconsistent application, and could
be used in hindsight by FINRA to pursue a firm if FINRA concludes
after-the-fact that the firm should have reported.\56\ In response,
FINRA clarifies that if a reasonable person would have concluded that a
violation occurred, then the matter is reportable, and if a reasonable
person would not have concluded that a violation occurred, then the
matter is not reportable; FINRA will rely on a firm's good-faith
reasonable determination.\57\
---------------------------------------------------------------------------
\56\ See CAI Letter, Commonwealth Letter, FSI Letter, NSCP
Letter and SIFMA Letter.
\57\ See Amendment No. 1 at 13.
---------------------------------------------------------------------------
Numerous commenters expressed concern that FINRA's statement that
the existence of internal audit findings creates a strong presumption
that a matter is reportable \58\ could undermine the internal audit
process at member firms.\59\ Similarly, commenters believe FINRA's
statement \60\ that matters subject to a firm's internal review
processes as required under other FINRA rules are subject to being
reported as internal conclusions under proposed FINRA Rule 4530(b)
could be problematic.\61\ One commenter believes this could result in
firms diluting their internal control findings.\62\ Two commenters
point out that this runs counter to previous guidance by NASD that it
would not use the reports and review processes contemplated by NASD
Rules 3012 and 3013 as a roadmap for disciplinary action against
firms.\63\ FINRA responds that the reporting obligation under proposed
FINRA Rule 4350(b) and the internal review processes set forth under
other rules (e.g., FINRA Rule 3130) are mutually exclusive and that,
while internal review processes may inform a member's determination
that a violation occurred, they do not by themselves lead to the
conclusion that a matter is reportable under proposed FINRA Rule
4350(b).\64\ FINRA notes that it would not view a discussion in an
internal audit report regarding the need for enhanced controls in a
particular area alone as determinative of a reportable violation under
proposed FINRA Rule 4350(b).\65\ FINRA also clarifies that, rather than
creating a strong presumption, an internal audit finding would serve
only as one factor, among others, that a firm should consider in
determining whether violative conduct occurred.\66\ Furthermore, FINRA
has stated that it believes that the goals of customer protection and
market integrity necessitate the reporting of such conduct to
FINRA.\67\
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\58\ See Notice, supra note 3, 75 FR at 47867.
\59\ See Commonwealth Letter, NSCP Letter and SIFMA Letter.
\60\ See Notice, supra note 3, 75 FR at 47867.
\61\ See CAI Letter, Commonwealth Letter and SIFMA Letter.
\62\ See SIFMA Letter.
\63\ See CAI Letter and Commonwealth Letter.
\64\ See Amendment No. 1 at 14-15.
\65\ See Amendment No. 1 at 15.
\66\ Id.
\67\ See Notice, supra note 3, 75 FR at 47867.
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D. Customer Complaints
Proposed FINRA Rule 4530(d) requires members to submit monthly
reports to FINRA regarding written customer complaints received by the
member. A member would not be required to report written complaints
relating to non-securities products, if such complaints are not from
customers that the member has engaged, or has sought to engage, in
securities activities.\68\ If a member has engaged, or has sought to
engage, in securities activities with a person, then any written
complaint from that person is reportable, regardless of whether it
relates to non-securities products.\69\ One commenter stated that it
would be difficult to determine with whom a firm has ``sought to
engage'' in securities activities, and also expressed concern regarding
the potential number of non-securities related complaints it would have
to report in connection with customers it ``sought to engage'' in
securities activities.\70\ In response, FINRA notes that the definition
of ``customer'' under NASD Rule 3070(c) includes persons with whom a
member has ``sought to engage'' in securities activities and,
therefore, firms should currently have procedures to identify whether a
person submitting a written complaint is someone that the firm has
sought to engage in securities activities. In addition, FINRA amended
proposed Supplementary Material .08 to clarify circumstances under
which a member would be required to report, pursuant to proposed FINRA
Rules 4530(d) and 4530(a)(1)(B), complaints from persons with whom the
member has engaged in securities activities versus persons with whom
the member has sought to engage in securities activities.\71\
---------------------------------------------------------------------------
\68\ See Notice, supra note 3, 75 FR at 47868. Proposed
Supplementary Material .08 defines ``customer'' as any person, other
than a broker or dealer, with whom a member has engaged, or has
sought to engage, in securities activities. This definition is
identical to the definition of ``customer'' contained in NASD Rule
3070(c).
\69\ Id.
\70\ See State Farm Letter.
\71\ See proposed FINRA Rule 4530.08, as modified by Amendment
No. 1.
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E. Duplicative Reporting
Three commenters believe that FINRA should completely eliminate
duplicative reporting requirements under proposed FINRA Rule 4530(e)
and Forms U4, U5 and BD.\72\ FINRA responds that it will work toward
this goal and that proposed FINRA Rule 4530(e) will eliminate
duplicative reporting of information disclosed on the Form U5.\73\
---------------------------------------------------------------------------
\72\ See CAI Letter, FSI Letter and SIFMA Letter.
\73\ See Amendment No. 1 at 18.
---------------------------------------------------------------------------
F. Former Associated Persons
Two commenters argued that the requirement to report certain events
related to former associated persons would be unduly burdensome and
recommend that the requirement be amended to conform to the record
retention requirements of Rule 17a-4 of the Act \74\ and the reporting
period for formerly associated persons be capped at three years.\75\ In
response, FINRA revised proposed Supplementary Material .07 to state
that a firm is not required to report information with respect to a
former associated person where, based on its records or information
available through Web CRD,
[[Page 69513]]
the member cannot determine whether the person was an associated
person.\76\
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\74\ 17 CFR 240.17a-4.
\75\ See CAI Letter and FSI Letter.
\76\ See proposed FINRA Rule 4530.07, as modified by Amendments
No. 1 and 2, which applies only if a firm has kept its records in
accordance with Rule 17a-4(e)(1) of the Act.
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G. Other Comments
One commenter urges the Commission to reject the rule and require
FINRA to provide a detailed analysis to support its claim that the
proposed rule will advance customer protection and market integrity
without placing an undue burden on firms.\77\ FINRA responds that the
proposed rule change would enhance FINRA's ability to detect and
investigate violative conduct.
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\77\ See PFS Letter.
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One commenter argues that the current dollar thresholds in the rule
that trigger a reporting obligation are too low and outdated.\78\ While
FINRA does not address this comment in Amendment No. 1, FINRA
previously responded that it believes the current dollar thresholds in
proposed FINRA Rule 4350 continue to be consistent with the purposes of
the rule, and that the $ 15,000 reporting threshold for an associated
person is consistent with the Forms U4 and U5 current reporting
thresholds.\79\
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\78\ See FSI Letter.
\79\ See Notice, supra note 3, 75 FR at 47867.
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Two commenters argue that FINRA does not have the jurisdiction to
require firms to report information required under the proposed rule,
such as matters relating to insurance laws and commodities laws.\80\ As
discussed above, FINRA notes that the requirement to report insurance
matters is consistent with other provisions of the current rules and
that this information is relevant to FINRA's programs as it assists
FINRA in identifying members and associated persons that may pose a
regulatory risk.\81\
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\80\ See CAI Letter and FSI Letter.
\81\ See supra notes 32-33 and accompanying text.
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IV. Discussion and Commission Findings
After carefully reviewing the proposed rule change, the comment
letters, and FINRA's response, 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.\82\ In particular, the Commission finds that
the proposed rule change is consistent with Section 15A(b)(6) of the
Act,\83\ which requires, among other things, that FINRA's rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest. The proposed rule change is consistent with FINRA's statutory
obligations under the Act to protect investors and the public interest
because it would enhance FINRA's ability to detect and investigate
violative conduct and to identify members and associated persons of
member firms that may pose a regulatory risk. The proposed rule change
streamlines the rules governing reporting requirements in NASD Rule
3070 and Incorporated NYSE Rule 351 while maintaining the disclosure
requirements in Incorporated NYSE Rule 351(a)(1) relating to internal
conclusions.
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\82\ In approving this proposed rule change, the Commission has
considered the proposed rule change's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\83\ 15 U.S.C. 78o-3(b)(6).
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The Commission believes that the changes made in Amendments No. 1
and 2 should provide greater clarity to members regarding when a
reporting requirement arises pursuant to proposed FINRA Rule 4350 and
the types of external findings, internal conclusions and customer
complaints that must be reported. The Commission believes the proposed
rule further strengthens FINRA's ability to effectively detect
violative conduct by members and associated persons and protect
investors. Further, as the proposed rule change consolidates the NYSE
and NASD reporting requirement rules into one rule in the Consolidated
FINRA Rulebook, it should simplify reporting requirements for broker-
dealers and their associated persons.
V. Accelerated Approval
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\84\ for approving the proposed rule change, as amended, prior
to the 30th day after publication of Amendments No. 1 and 2 in the
Federal Register. The changes proposed in Amendments No. 1 and 2
respond to specific concerns raised by commenters and do not raise
additional issues. The rule change should enhance FINRA's ability to
oversee the conduct of its members and their associated persons, which
should further investor protection and the public interest.
Accordingly, the Commission finds that good cause exists to approve the
proposal, as modified by Amendments No. 1 and 2, on an accelerated
basis.
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\84\ 15 U.S.C. 78s(b)(2).
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VI. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether Amendments No. 1
and 2 to the proposed rule change are 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-2010-039 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-2010-034. 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 website
viewing and printing 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 filings 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-2010-034
and should be submitted on or before December 3, 2010.
[[Page 69514]]
VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\85\ that the proposed rule change (SR-FINRA-2010-034), as modified
by Amendments No. 1 and 2, be, and hereby is, approved on an
accelerated basis.
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\85\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\86\
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\86\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-28444 Filed 11-10-10; 8:45 am]
BILLING CODE 8011-01-P
