Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change Adopting, as Modified by Amendment No. 1, Rules Governing Guarantees, Carrying Agreements, Security Counts and Supervision of General Ledger Accounts in the Consolidated FINRA Rulebook, 12380-12384 [2011-5024]
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12380
Federal Register / Vol. 76, No. 44 / Monday, March 7, 2011 / Notices
Investing Fund Sub-Advisor waives
fees, the benefit of the waiver will be
passed through to the Investing
Management Company.
6. No Investing Fund or Investing
Fund Affiliate (except to the extent it is
acting in its capacity as an investment
adviser to a Fund) will cause a Fund to
purchase a security in an Affiliated
Underwriting.
7. The Board of the Fund, including
a majority of the disinterested Board
members, will adopt procedures
reasonably designed to monitor any
purchases of securities by the Fund in
an Affiliated Underwriting, once an
investment by an Investing Fund in the
securities of the Fund exceeds the limit
of section 12(d)(1)(A)(i) of the Act,
including any purchases made directly
from an Underwriting Affiliate. The
Board will review these purchases
periodically, but no less frequently than
annually, to determine whether the
purchases were influenced by the
investment by the Investing Fund in the
Fund. The Board will consider, among
other things: (i) Whether the purchases
were consistent with the investment
objectives and policies of the Fund;
(ii) how the performance of securities
purchased in an Affiliated Underwriting
compares to the performance of
comparable securities purchased during
a comparable period of time in
underwritings other than Affiliated
Underwritings or to a benchmark such
as a comparable market index; and
(iii) whether the amount of securities
purchased by the Fund in Affiliated
Underwritings and the amount
purchased directly from an
Underwriting Affiliate have changed
significantly from prior years. The
Board will take any appropriate actions
based on its review, including, if
appropriate, the institution of
procedures designed to assure that
purchases of securities in Affiliated
Underwritings are in the best interest of
shareholders.
8. Each Fund will maintain and
preserve permanently in an easily
accessible place a written copy of the
procedures described in the preceding
condition, and any modifications to
such procedures, and will maintain and
preserve for a period of not less than six
years from the end of the fiscal year in
which any purchase in an Affiliated
Underwriting occurred, the first two
years in an easily accessible place, a
written record of each purchase of
securities in Affiliated Underwritings
once an investment by an Investing
Fund in the securities of the Fund
exceeds the limit of section
12(d)(1)(A)(i) of the Act, setting forth
from whom the securities were
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acquired, the identity of the
underwriting syndicate’s members, the
terms of the purchase, and the
information or materials upon which
the Board’s determinations were made.
9. Before investing in a Fund in
excess of the limits in section
12(d)(1)(A), an Investing Fund will
execute a FOF Participation Agreement
with the Fund stating that their
respective boards of directors or trustees
and their investment advisers, or
Trustee and Sponsor, as applicable,
understand the terms and conditions of
the order, and agree to fulfill their
responsibilities under the order. At the
time of its investment in shares of a
Fund in excess of the limit in section
12(d)(1)(A)(i), an Investing Fund will
notify the Fund of the investment. At
such time, the Investing Fund will also
transmit to the Fund a list of the names
of each Investing Fund Affiliate and
Underwriting Affiliate. The Investing
Fund will notify the Fund of any
changes to the list as soon as reasonably
practicable after a change occurs. The
Fund and the Investing Fund will
maintain and preserve a copy of the
order, the FOF Participation Agreement,
and the list with any updated
information for the duration of the
investment and for a period of not less
than six years thereafter, the first two
years in an easily accessible place.
10. Before approving any advisory
contract under section 15 of the Act, the
board of directors or trustees of each
Investing Management Company,
including a majority of the disinterested
directors or trustees, will find that the
advisory fees charged under such
contract are based on services provided
that will be in addition to, rather than
duplicative of, the services provided
under the advisory contract(s) of any
Fund in which the Investing
Management Company may invest.
These findings and their basis will be
recorded fully in the minute books of
the appropriate Investing Management
Company.
11. Any sales charges and/or service
fees charged with respect to shares of an
Investing Fund will not exceed the
limits applicable to a fund of funds as
set forth in NASD Conduct Rule 2830.
12. No Fund relying on this section
12(d)(1) relief will acquire securities of
any investment company or company
relying on section 3(c)(1) or 3(c)(7) of
the Act in excess of the limits contained
in section 12(d)(1)(A) of the Act, except
to the extent permitted by exemptive
relief from the Commission permitting
the Fund to purchase shares of other
investment companies for short-term
cash management purposes.
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For the Commission, by the Division of
Investment Management, under delegated
authority.
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011–5064 Filed 3–4–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63999; File No. SR–FINRA–
2010–061]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed
Rule Change Adopting, as Modified by
Amendment No. 1, Rules Governing
Guarantees, Carrying Agreements,
Security Counts and Supervision of
General Ledger Accounts in the
Consolidated FINRA Rulebook
March 1, 2011.
I. Introduction
On November 12, 2010, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Exchange Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to adopt rules governing
guarantees, carrying agreements,
security counts and supervision of
general ledger accounts in the
consolidated FINRA Rulebook. The
proposed rule change was published for
comment in the Federal Register on
November 24, 2010.3 The Commission
received one comment letter on the
proposed rule change.4 On February 24,
2011, FINRA responded to the
comments and filed Amendment No. 1
to the proposed rule change.5 The
Commission is publishing this notice
and order to solicit comments on
Amendment No. 1 and to approve the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Exchange Act Release No. 63375 (November
24, 2010), 75 FR 74759 (December 1, 2010) (Notice
of Filing of Proposed Rule Change; File No. SR–
FINRA–2010–061) (‘‘Notice’’).
4 See Letter from D. Grant Vingoe, Arnold &
Porter LLP (‘‘Arnold & Porter’’), to Elizabeth M.
Murphy, Secretary, SEC, dated December 22, 2010
(available at https://www.sec.gov/comments/sr-finra2010–061/finra2010061.shtml).
5 See Amendment No. 1 dated February 24, 2011
(‘‘Amendment No. 1’’) and FINRA’s response to
comments, dated February 24, 2011 (‘‘Response to
Comments’’), which are available on FINRA’s Web
site at https://www.finra.org, at the principal office
of FINRA, and on the Commission’s Web site at
https://www.sec.gov/rules/sro.shtml.
2 17
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proposed rule change, as modified by
Amendment No. 1, on an accelerated
basis.
II. Description of Proposed Rule
Change, as Modified by Amendment
No. 1
A. Background
srobinson on DSKHWCL6B1PROD with NOTICES
1. Purpose
As part of the process of developing
a new consolidated rulebook
(‘‘Consolidated FINRA Rulebook’’),6
FINRA is proposing to adopt new,
consolidated rules governing
guarantees, carrying agreements,
security counts and supervision of
general ledger accounts. FINRA
proposes to adopt FINRA Rules 4150
(Guarantees by, or Flow Through
Benefits for, Members), 4311 (Carrying
Agreements), 4522 (Periodic Security
Counts, Verifications and Comparisons)
and 4523 (Assignment of Responsibility
for General Ledger Accounts and
Identification of Suspense Accounts) in
the Consolidated FINRA Rulebook and
to delete NASD Rule 3230, NYSE Rules
322, 382, 440.10 and 440.20 and NYSE
Rule Interpretations 382/01 through
382/05, 409(a)/01 and 440.20/01.7
The proposed rules would, in
combination with other consolidated
financial responsibility rules approved
by the SEC,8 enhance FINRA’s authority
to execute effectively its financial and
operational surveillance and
examination programs. Consistent with
the approach that FINRA discussed in
SR–FINRA–2008–067 and Regulatory
Notice 09–71, many of the requirements
set forth in the proposed rules are
substantially the same as requirements
found in current rules and, where
appropriate, are tiered to apply only to
carrying or clearing firms, or to firms
that engage in certain specified
6 The current FINRA rulebook consists of: (1)
FINRA Rules; (2) NASD Rules; and (3) rules
incorporated from NYSE (‘‘Incorporated NYSE
Rules’’) (together, the NASD Rules and Incorporated
NYSE Rules are referred to as the ‘‘Transitional
Rulebook’’). While the NASD Rules generally apply
to all FINRA members, the Incorporated NYSE
Rules apply only to those members of FINRA that
are also members of the NYSE (‘‘Dual Members’’).
The FINRA Rules apply to all FINRA members,
unless such rules have a more limited application
by their terms. For more information about the
rulebook consolidation process, see Information
Notice, March 12, 2008 (Rulebook Consolidation
Process).
7 For convenience, the Incorporated NYSE Rules
are referred to as the ‘‘NYSE Rules.’’
8 See Exchange Act Release No. 60933 (November
4, 2009), 74 FR 58334 (November 12, 2009) (Order
Granting Accelerated Approval to Proposed Rule
Change; File No. SR–FINRA–2008–067). See also
Regulatory Notice 09–71 (December 2009) (SEC
Approves Consolidated FINRA Rules Governing
Financial Responsibility) and Regulatory Notice 09–
03 (January 2009) (Financial Responsibility and
Related Operational Rules).
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activities.9 Certain of the proposed rule
provisions are new for FINRA members
that are not Dual Members (‘‘non-NYSE
members’’). Certain other provisions are
new for both Dual Members and nonNYSE members alike.
In Amendment No. 1, FINRA
proposes new Supplementary Material
.04 to Rule 4311. This Supplementary
Material is technical in nature. It is
intended to remind members that, for
purposes of paragraphs (c)(1)(F) and
(c)(2) of Rule 4311, the receipt and
delivery of customers’ funds and
securities and the safeguarding of such
funds and securities must comply with
the requirements of the SEC’s financial
responsibility rules, in particular
Exchange Act Rule 15c3–3 and
applicable SEC guidance. Amendment
No. 1 would redesignate the original
Supplementary Material .04 as .05.
2. Proposed Amendments
FINRA proposes the following
amendments to its rules.
(A) Proposed FINRA Rule 4150
(Guarantees by, or Flow Through
Benefits for, Members)
As stated in the Notice, Proposed Rule
4150(a) is based in large part on NYSE
Rule 322.10 Proposed Rule 4150(a)
requires that prior written notice be
given to FINRA whenever a member
guarantees, endorses or assumes,
directly or indirectly, the obligations 11
or liabilities of another person
(including an entity).12 Paragraph (b) of
the rule requires that prior written
approval must be obtained from FINRA
whenever any member receives flowthrough capital benefits in accordance
9 For purposes of the new consolidated financial
responsibility rules and the proposed rules, FINRA
has specified in the rule text where appropriate that
all requirements that apply to a member that clears
or carries customer accounts also apply to any
member that, operating pursuant to the exemptive
provisions of Exchange Act Rule 15c3–3(k)(2)(i),
either clears customer transactions pursuant to such
exemptive provisions or holds customer funds in a
bank account established thereunder. For further
discussion, see 74 FR 58334. See also proposed
FINRA Rule 4523.02 in this rule filing.
10 NASD Rules do not have a provision that
corresponds to NYSE Rule 322. Accordingly, the
requirements of proposed FINRA Rule 4150 would
be new to non-NYSE members.
11 FINRA noted that the term ‘‘obligations’’
includes financial obligations, as well as other
obligations that may have a financial impact on a
member, such as performance obligations.
12 NASD Rule 0120(n) defines ‘‘person’’ to include
any natural person, partnership, corporation,
association, or other legal entity. Similarly, NYSE
Rule 2(d) states that ‘‘person’’ means a natural
person, corporation, limited liability company,
partnership, association, joint stock company, trust,
fund or any organized group of persons whether
incorporated or not. All references to ‘‘persons’’ in
this filing include entities.
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12381
with Appendix C of Exchange Act Rule
15c3–1.13
(B) Proposed FINRA Rule 4311
(Carrying Agreements)
Proposed FINRA Rule 4311 is based
on NASD Rule 3230 and NYSE Rule
382.14 The proposed rule governs the
requirements applicable to members
when entering into agreements for the
carrying of any customer accounts in
which securities transactions can be
effected. Historically, the purpose of the
NASD and NYSE rules upon which the
proposed rule is based has been to
ensure that certain functions and
responsibilities are clearly allocated to
either the introducing or carrying firm,
consistent with the requirements of the
self-regulatory organization and SEC’s
financial responsibility and other rules
and regulations, as applicable.15
As discussed in the Notice, Proposed
FINRA Rule 4311(a)(1) prohibits a
member, unless otherwise permitted by
FINRA, from entering into an agreement
for the carrying on an omnibus or fully
disclosed basis, of any customer account
in which securities transactions can be
effected, unless the agreement is with a
carrying firm that is a FINRA member.
Proposed FINRA Rule 4311(b)(1)
requires that the carrying firm must
submit to FINRA for prior approval any
agreement for the carrying of accounts,
whether on an omnibus or fully
disclosed basis, before such agreement
may become effective.16 The proposed
rule also provides that the carrying firm
must submit to FINRA for prior
approval any material changes to an
approved carrying agreement before the
changes may become effective. The
proposed rule codifies the practice
under NASD Rule 3230 of permitting
use of pre-approved standardized forms
of agreement, with the exception of
agreements with parties that are not
U.S.-registered broker-dealers. The
proposed rule requires a carrying firm to
submit to FINRA for approval each
carrying agreement with a non-U.S.registered broker-dealer.
FINRA Rule 4311(b)(3) codifies the
current practice under NYSE Rule 382
of requiring that as early as possible, but
13 FINRA notes the proposed rule is designed to
align with the requirements of Appendix C.
14 Proposed FINRA Rule 4311 also is based on
NYSE Rule Interpretations 382/01 through/05 and
409(a)/01.
15 See, e.g., Notice to Members 94–7 (February
1994) (SEC Approves New NASD Rule Relating to
the Obligations and Responsibilities of Introducing
and Clearing Firms) and NYSE Information Memo
82–18 (March 1982) (Carrying Agreements—
Amendments to Rules 382 and 405).
16 Proposed FINRA Rule 4311(b)(1) is consistent
with the requirements of NASD Rule 3230(e) and
NYSE Rule 382(a).
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srobinson on DSKHWCL6B1PROD with NOTICES
not later than 10 business days, prior to
the carrying of any accounts of a new
introducing firm (including the
accounts of any piggyback or
intermediary introducing firm(s)), the
carrying firm must submit to FINRA a
notice identifying each such introducing
firm by name and CRD number and
include such additional information as
FINRA may require.17 FINRA Rule
4311(b)(4) expressly requires each
carrying firm to conduct appropriate
due diligence with respect to any new
introducing firm relationship. The rule
provides that such due diligence must
assess the financial, operational, credit
and reputational risk that such
arrangement will have upon the
carrying firm. The rule also provides
that FINRA, in its review of any
arrangement, may in its discretion
require specific items to be addressed by
the carrying firm as part of the firm’s
due diligence requirement under the
rule. The rule further provides that the
carrying firm must maintain a record, in
accord with the time frames prescribed
by Exchange Act Rule 17a–4(b), of the
due diligence conducted for each new
introducing firm.
Proposed FINRA Rule 4311(c)
requires that each carrying agreement in
which accounts are to be carried on a
fully disclosed basis must specify the
responsibilities of each party to the
agreement.18 The proposed rule also
requires each carrying agreement in
which accounts are to be carried on a
fully disclosed basis to expressly
allocate to the carrying firm the
responsibility for preparing and
transmitting statements of account to
customers.
FINRA Proposed Rule 4311(d)
requires that each customer whose
account is introduced on a fully
disclosed basis must be notified in
writing upon the opening of the account
of the existence of the carrying
agreement and the responsibilities
allocated to each respective party.19
Proposed FINRA Rule 4311(e)
requires that each carrying agreement
must expressly state that to the extent
that a particular responsibility is
allocated to one party, the other party or
parties will supply to the responsible
organization all appropriate data in their
possession pertinent to the proper
17 This is a new requirement for non-NYSE
carrying members, and permits FINRA to obtain
additional information that enables it to evaluate
the impact of the new carrying arrangement on the
financial and operational condition of the member.
18 Proposed FINRA Rule 4311(c) is based in part
on NASD Rule 3230(a) and NYSE Rule 382(b).
19 Proposed FINRA Rule 4311(d) is based in part
on NASD Rule 3230(g), NYSE Rule 382(c), and
NYSE Rule Interpretation 382/03.
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performance and supervision of that
responsibility.20
Proposed FINRA Rule 4311(f)
provides that a carrying agreement may
authorize an introducing firm to issue
negotiable instruments directly to its
customers on the carrying firm’s behalf,
using instruments for which the
carrying firm is the maker or drawer,
provided that the parties comply with
Exchange Act Rule 15c3–3 and further
that the introducing firm represents to
the carrying firm in writing that the
introducing firm maintains, and will
enforce, supervisory policies and
procedures with respect to such
negotiable instruments that are
satisfactory to the carrying firm.21
Proposed FINRA Rules 4311(g) and
4311(h) generally address obligations of
parties to provide referenced
information, such as any written
customer complaints and exception
reports, to each other and/or to FINRA
and are based upon existing NASD and
NYSE rule provisions.
Proposed FINRA Rule 4311(i)
provides that all carrying agreements
must require each introducing firm to
maintain its proprietary and customer
accounts, and the proprietary and
customer accounts of any introducing
firm for which it is acting as an
intermediary in obtaining clearing
services from the carrying firm, in such
a manner as to enable the carrying firm
and FINRA to specifically identify the
proprietary and customer accounts
belonging to each introducing firm.22
(C) Proposed FINRA Rule 4522 (Periodic
Security Counts, Verifications and
Comparisons)
Proposed FINRA Rule 4522(a)
requires each member firm that is
subject to the requirements of Exchange
Act Rule 17a–13 to make the counts,
examinations, verifications,
comparisons, and entries set forth in
that rule.23 Proposed FINRA Rule
4522(b) requires each carrying or
clearing member subject to Exchange
Act Rule 17a–13 to make more frequent
counts, examinations, verifications,
comparisons, and entries where prudent
business practice would so require.24
20 This is a new requirement for non-NYSE
members.
21 Proposed FINRA Rule 4311(f) is based in part
on NASD Rule 3230(d) and NYSE Rule 382(f).
22 Proposed FINRA Rule 4311(i) is based largely
on NASD Rule 3230(h) and does not have a
corresponding provision in NYSE Rule 382.
23 Proposed FINRA Rule 4522(a) is based in part
on NYSE Rule 440.10.
24 Id.
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(D) Proposed FINRA Rule 4523
(Assignment of Responsibility for
General Ledger Accounts and
Identification of Suspense Accounts)
Proposed FINRA Rule 4523 is
intended to help assure the accuracy of
each member’s books and records.25
Proposed FINRA Rule 4523(a) requires
that each member must designate an
associated person to be responsible for
each general ledger bookkeeping
account and account of similar function
used by the member. The associated
person must control and oversee entries
into each such account and determine
that the account is current and accurate
as necessary to comply with all
applicable FINRA rules and federal
securities laws governing books and
records and financial responsibility
requirements.
Proposed FINRA Rule 4523(b)
requires that each carrying or clearing
member must maintain a record of the
name of each individual assigned
primary and supervisory responsibility
for each account as required by
paragraph (a) of the rule.
Proposed FINRA Rule 4523(c)
provides that each member must record,
in an account that must be clearly
identifiable as a suspense account,
money charges or credits and receipts or
deliveries of securities whose ultimate
disposition is pending determination.
(E) Implementation Date
FINRA will announce the
implementation date of these proposed
rule changes in a Regulatory Notice to
be published no later than 90 days
following Commission approval. The
implementation date will be no later
than 120 days following publication of
the Regulatory Notice announcing
Commission approval.
III. Summary of Comment Letter and
FINRA’s Response
The proposed rule change was
published for comment in the Federal
Register on November 24, 2010, and the
comment period closed on December
22, 2010. The Commission received one
comment letter in response to the
proposing release, the Arnold & Porter
letter.26 Arnold & Porter expressed
concerns about the scope of proposed
FINRA Rule 4311. Specifically, the
commenter suggested that proposed
FINRA Rule 4311 was not clear as to
whether a FINRA member firm that
25 Proposed FINRA Rule 4523 is based on NYSE
Rule 440.20. NASD Rules do not have a provision
that corresponds to NYSE Rule 440.20; therefore,
the requirements of proposed FINRA Rule 4523 are
new to non-NYSE members.
26 See supra note 4.
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operates pursuant to the exemptive
provision of Exchange Act Rule 15c3–
3(k)(2)(i) is engaged in carrying activity
and, thereby, subject to the rule. In
FINRA’s response, it noted that FINRA
had specified in the rule text where
appropriate those requirements of the
proposed rule which are intended to
apply to firms that operate pursuant to
the exemptive provisions of Exchange
Act Rule 15c3–3(k)(2)(i).27
The Arnold & Porter letter also raised
concerns as to whether proposed FINRA
Rule 4311 impacts the status of DVP/
RVP clearance and settlement
arrangements across international
borders that may be structured as
omnibus accounts where U.S.-registered
broker-dealers seek to designate these
accounts at a foreign affiliate as
approved foreign control locations
under Exchange Act Rule 15c3–3. As
FINRA stated in its response, the
proposed rule applies to arrangements
to carry customer accounts and is ‘‘not
meant to address the substantive
requirements of SEA Rule 15c3–3(c) as
it applies to good control locations nor
to apply to cross-border clearance and
settlement arrangements that are
structured on a basis that is permissible
under and consistent with SEC rules.’’ 28
Finally, FINRA noted that the
propriety of structuring cross-border
clearance and settlement arrangements
in the manner described by the
commenter, and the propriety of a U.S.registered broker-dealer’s reliance on
Exchange Act Rule 15c3–3(k)(2)(i) for
various business activities, were outside
the scope of the proposed rule change.29
srobinson on DSKHWCL6B1PROD with NOTICES
IV. Discussion and Commission
Findings
The Commission has carefully
considered the proposed rule change, as
modified by Amendment No. 1, the
comment letter received, and FINRA’s
response, and finds that the proposed
rule change is consistent with the
requirements of the Exchange Act and
the rules and regulations thereunder
that are applicable to a national
securities association.30 In particular,
27 See also Notice, note 6, at FR 74760 (stating,
‘‘[f]or purposes of the new consolidated financial
responsibility rules and the proposed rules, FINRA
has specified in the rule text where appropriate that
all requirements that apply to a member that clears
or carries customer accounts also apply to any
member that, operating pursuant to the exemptive
provisions of SEA Rule 15c3–3(k)(2)(i), either clears
customer transactions pursuant to such exemptive
provisions or holds customer funds in a bank
account established thereunder.’’).
28 See Response to Comments.
29 Id.
30 In approving this proposed rule change, the
Commission notes that it has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
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the Commission finds that the proposal
is consistent with Section 15A(b)(6) of
the Exchange Act,31 which requires,
among other things, that the rules of a
national securities association be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, protect
investors and the public interest.
The Commission believes that FINRA
adequately addressed the concerns
raised by the commenter in its response.
Further, the rule language in
Amendment No. 1 reminds FINRA
members that, for purposes of
paragraphs (c)(1)(F) and (c)(2) of Rule
4311, the receipt and delivery of
customers’ funds and securities and the
safeguarding of such funds and
securities must comply with the
requirements of the SEC’s financial
responsibility rules, in particular
Exchange Act Rule 15c3–3 and
applicable SEC guidance. The
Commission believes the proposed rule
change, as modified by Amendment No.
1, will further the purposes of the
Exchange Act by, among other things,
clarifying and streamlining the
requirements surrounding carrying
agreements, as well as the rules
governing guarantees, security counts,
and supervision of general ledger
accounts.
V. Accelerated Approval
The Commission finds good cause,
pursuant to Section 19(b)(2) of the
Exchange Act,32 for approving the
proposed rule change, as modified by
Amendment No. 1 thereto, prior to the
30th day after publication of
Amendment No. 1 in the Federal
Register. The changes proposed in
Amendment No. 1 add clarity to Rule
4311 and do not raise novel regulatory
concerns. In particular, Amendment No.
1 further reminds FINRA members that,
for purposes of paragraphs (c)(1)(F) and
(c)(2) of Rule 4311, receipt and delivery
of customers’ funds and securities and
the safeguarding of such funds and
securities must comply with the
requirements of the SEC’s financial
responsibility rules, in particular
Exchange Act Rule 15c3–3 and
applicable SEC guidance.
Accordingly, the Commission finds
that good cause exists to approve the
proposal, as modified by Amendment
No. 1, on an accelerated basis.
31 15
32 15
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U.S.C. 78o–3(b)(6).
U.S.C. 78s(b)(2).
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12383
VI. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether Amendment No. 1 to
the proposed rule change is consistent
with the Exchange 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–2010–061 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–
061. 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
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–2010–061 and
should be submitted on or before March
28, 2011.
E:\FR\FM\07MRN1.SGM
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12384
Federal Register / Vol. 76, No. 44 / Monday, March 7, 2011 / Notices
VII. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,33
that the proposed rule change (SR–
FINRA–2010–061), as modified by
Amendment No. 1, be, and hereby is,
approved on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011–5024 Filed 3–4–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63998; File No. SR–CBOE–
2011–018]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Codify a Fee Schedule
for the Sale by Market Data Express,
LLC, of a BBO Data Feed for Securities
Traded on CBSX
March 1, 2011.
srobinson on DSKHWCL6B1PROD with NOTICES
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on February
17, 2011, Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
This proposal submitted by Chicago
Board Options Exchange, Incorporated
(‘‘CBOE’’ or ‘‘Exchange’’) is to codify a fee
schedule for the sale by Market Data
Express, LLC (‘‘MDX’’), an affiliate of
CBOE, of a data product that includes
CBOE Stock Exchange (‘‘CBSX’’) best bid
and offer and trade data and certain
related market data. The text of the
proposed rule change is available on the
Exchange’s Web site (https://
www.cboe.org/legal), at the Exchange’s
Office of the Secretary and at the
Commission’s Public Reference Room.
33 15
U.S.C. 78(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
34 17
VerDate Mar<15>2010
17:54 Mar 04, 2011
Jkt 223001
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
CBOE included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. CBOE has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to establish fees that MDX will
charge for the sale of certain market data
with respect to the trading of securities
on CBSX. CBSX is CBOE’s stock trading
facility.
CBOE currently collects and processes
market data with respect to quotes and
orders and the prices of trades for all
securities that are traded on CBSX. This
market data includes the ‘‘best bid and
offer,’’ or ‘‘BBO’’, consisting of all
outstanding quotes and standing orders
at the best available price level on each
side of the market, with aggregate size
(‘‘BBO data,’’ sometimes referred to as
‘‘top of book data’’). Data with respect to
executed trades is referred to as ‘‘last
sale’’ data. CBOE reports CBSX BBO
data under the Consolidated Quotation
Plan (‘‘CQ Plan’’) and CBSX last sale data
under the Consolidated Tape
Association Plan (‘‘CTA Plan’’) with
respect to NYSE-listed securities and
securities listed on exchanges other than
NYSE and Nasdaq for inclusion in those
Plans’ consolidated data streams. CBOE
reports CBSX BBO data and CBSX last
sale data under the Nasdaq Unlisted
Trading Privileges Plan (‘‘Nasdaq/UTP
Plan’’) with respect to Nasdaq-listed
securities for inclusion in that Plan’s
consolidated data stream.
MDX provides to ‘‘Customers’’ 3 a realtime, low latency data feed that includes
the CBSX BBO data and last sale data.
(This data feed is sometimes referred to
in this filing as the ‘‘BBO Data Feed’’).
The BBO and last sale data contained in
the BBO Data Feed is identical to the
data that CBOE sends to the processors
3 A ‘‘Customer’’ is any entity that receives the BBO
Data Feed directly from MDX’s system and then
distributes it either internally or externally to
Subscribers. A ‘‘Subscriber’’ is a person (other than
an employee of a Customer) that receives the BBO
Data Feed from a Customer for its own internal use.
PO 00000
Frm 00070
Fmt 4703
Sfmt 4703
under the CQ, CTA and Nasdaq/UTP
Plans.4 In addition, the BBO Data Feed
includes certain data that is not
included in the data sent to the
processors under the CQ, CTA and
Nasdaq/UTP Plans, namely, totals of
customer versus non-customer shares at
the BBO and All-or-None contingency
orders priced better than or equal to the
BBO. The purpose of this proposed rule
change is to establish the fees MDX will
charge for the sale of the BBO Data
Feed.
MDX would charge Customers a
‘‘direct connect fee’’ of $500 per
connection per month. MDX would also
charge Customers a ‘‘per user fee’’ of $25
per month per ‘‘Authorized User’’ or
‘‘Device’’ for receipt of the BBO Data
Feed by Subscribers. An ‘‘Authorized
User’’ is defined as an individual user
(an individual human being) who is
uniquely identified (by user ID and
confidential password or other
unambiguous method reasonably
acceptable to MDX) and authorized by
a Customer to access the BBO Data Feed
supplied by the Customer. A ‘‘Device’’ is
defined as any computer, workstation or
other item of equipment, fixed or
portable, that receives, accesses and/or
displays data in visual, audible or other
form. Either a CBSX Trading Permit
Holder or a non-CBSX Trading Permit
Holder may be a Customer. All
Customers would be assessed the same
fees.
The proposed fees would be
implemented on March 1, 2011.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the requirements of Section 6(b) of the
Securities Exchange Act of 1934
(‘‘Act’’) 5 in general, and, in particular,
with Section 6(b)(4) of the Act 6 in that
it provides for the equitable allocation
of reasonable dues, fees and other
charges among CBSX Trading Permit
Holders and other persons using its
facilities, and with Section 6(b)(5) 7 of
the Act in that there will be no unfair
discrimination between customers,
issuers, brokers, or dealers in the
distribution of the data. In addition, the
Exchange believes that the proposed
4 The Exchange notes that MDX makes available
to Customers the BBO data and last sale data that
is included in the BBO Data Feed no earlier than
the time at which the Exchange sends that data to
the processors under the CQ, CTA and Nasdaq/UTP
Plans. The Exchange also notes that it also makes
the BBO data and last sale data that is included in
the BBO Data Feed available directly to CBSX
Trading Permit Holders, and permits them to
redistribute the data to their customers.
5 15 U.S.C. 78f(b).
6 15 U.S.C. 78f(b)(4).
7 15 U.S.C. 78f(b)(5).
E:\FR\FM\07MRN1.SGM
07MRN1
]]>Agencies
[Federal Register Volume 76, Number 44 (Monday, March 7, 2011)]
[Notices]
[Pages 12380-12384]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-5024]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63999; File No. SR-FINRA-2010-061]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed Rule Change Adopting, as Modified by
Amendment No. 1, Rules Governing Guarantees, Carrying Agreements,
Security Counts and Supervision of General Ledger Accounts in the
Consolidated FINRA Rulebook
March 1, 2011.
I. Introduction
On November 12, 2010, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to adopt rules governing
guarantees, carrying agreements, security counts and supervision of
general ledger accounts in the consolidated FINRA Rulebook. The
proposed rule change was published for comment in the Federal Register
on November 24, 2010.\3\ The Commission received one comment letter on
the proposed rule change.\4\ On February 24, 2011, FINRA responded to
the comments and filed Amendment No. 1 to the proposed rule change.\5\
The Commission is publishing this notice and order to solicit comments
on Amendment No. 1 and to approve the
[[Page 12381]]
proposed rule change, as modified by Amendment No. 1, on an accelerated
basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 63375 (November 24, 2010), 75
FR 74759 (December 1, 2010) (Notice of Filing of Proposed Rule
Change; File No. SR-FINRA-2010-061) (``Notice'').
\4\ See Letter from D. Grant Vingoe, Arnold & Porter LLP
(``Arnold & Porter''), to Elizabeth M. Murphy, Secretary, SEC, dated
December 22, 2010 (available at https://www.sec.gov/comments/sr-finra-2010-061/finra2010061.shtml).
\5\ See Amendment No. 1 dated February 24, 2011 (``Amendment No.
1'') and FINRA's response to comments, dated February 24, 2011
(``Response to Comments''), which are available on FINRA's Web site
at https://www.finra.org, at the principal office of FINRA, and on
the Commission's Web site at https://www.sec.gov/rules/sro.shtml.
---------------------------------------------------------------------------
II. Description of Proposed Rule Change, as Modified by Amendment No. 1
A. Background
1. Purpose
As part of the process of developing a new consolidated rulebook
(``Consolidated FINRA Rulebook''),\6\ FINRA is proposing to adopt new,
consolidated rules governing guarantees, carrying agreements, security
counts and supervision of general ledger accounts. FINRA proposes to
adopt FINRA Rules 4150 (Guarantees by, or Flow Through Benefits for,
Members), 4311 (Carrying Agreements), 4522 (Periodic Security Counts,
Verifications and Comparisons) and 4523 (Assignment of Responsibility
for General Ledger Accounts and Identification of Suspense Accounts) in
the Consolidated FINRA Rulebook and to delete NASD Rule 3230, NYSE
Rules 322, 382, 440.10 and 440.20 and NYSE Rule Interpretations 382/01
through 382/05, 409(a)/01 and 440.20/01.\7\
---------------------------------------------------------------------------
\6\ The current FINRA rulebook consists of: (1) FINRA Rules; (2)
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated
NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules
are referred to as the ``Transitional Rulebook''). While the NASD
Rules generally apply to all FINRA members, the Incorporated NYSE
Rules apply only to those members of FINRA that are also members of
the NYSE (``Dual Members''). The FINRA Rules apply to all FINRA
members, unless such rules have a more limited application by their
terms. For more information about the rulebook consolidation
process, see Information Notice, March 12, 2008 (Rulebook
Consolidation Process).
\7\ For convenience, the Incorporated NYSE Rules are referred to
as the ``NYSE Rules.''
---------------------------------------------------------------------------
The proposed rules would, in combination with other consolidated
financial responsibility rules approved by the SEC,\8\ enhance FINRA's
authority to execute effectively its financial and operational
surveillance and examination programs. Consistent with the approach
that FINRA discussed in SR-FINRA-2008-067 and Regulatory Notice 09-71,
many of the requirements set forth in the proposed rules are
substantially the same as requirements found in current rules and,
where appropriate, are tiered to apply only to carrying or clearing
firms, or to firms that engage in certain specified activities.\9\
Certain of the proposed rule provisions are new for FINRA members that
are not Dual Members (``non-NYSE members''). Certain other provisions
are new for both Dual Members and non-NYSE members alike.
---------------------------------------------------------------------------
\8\ See Exchange Act Release No. 60933 (November 4, 2009), 74 FR
58334 (November 12, 2009) (Order Granting Accelerated Approval to
Proposed Rule Change; File No. SR-FINRA-2008-067). See also
Regulatory Notice 09-71 (December 2009) (SEC Approves Consolidated
FINRA Rules Governing Financial Responsibility) and Regulatory
Notice 09-03 (January 2009) (Financial Responsibility and Related
Operational Rules).
\9\ For purposes of the new consolidated financial
responsibility rules and the proposed rules, FINRA has specified in
the rule text where appropriate that all requirements that apply to
a member that clears or carries customer accounts also apply to any
member that, operating pursuant to the exemptive provisions of
Exchange Act Rule 15c3-3(k)(2)(i), either clears customer
transactions pursuant to such exemptive provisions or holds customer
funds in a bank account established thereunder. For further
discussion, see 74 FR 58334. See also proposed FINRA Rule 4523.02 in
this rule filing.
---------------------------------------------------------------------------
In Amendment No. 1, FINRA proposes new Supplementary Material .04
to Rule 4311. This Supplementary Material is technical in nature. It is
intended to remind members that, for purposes of paragraphs (c)(1)(F)
and (c)(2) of Rule 4311, the receipt and delivery of customers' funds
and securities and the safeguarding of such funds and securities must
comply with the requirements of the SEC's financial responsibility
rules, in particular Exchange Act Rule 15c3-3 and applicable SEC
guidance. Amendment No. 1 would redesignate the original Supplementary
Material .04 as .05.
2. Proposed Amendments
FINRA proposes the following amendments to its rules.
(A) Proposed FINRA Rule 4150 (Guarantees by, or Flow Through Benefits
for, Members)
As stated in the Notice, Proposed Rule 4150(a) is based in large
part on NYSE Rule 322.\10\ Proposed Rule 4150(a) requires that prior
written notice be given to FINRA whenever a member guarantees, endorses
or assumes, directly or indirectly, the obligations \11\ or liabilities
of another person (including an entity).\12\ Paragraph (b) of the rule
requires that prior written approval must be obtained from FINRA
whenever any member receives flow-through capital benefits in
accordance with Appendix C of Exchange Act Rule 15c3-1.\13\
---------------------------------------------------------------------------
\10\ NASD Rules do not have a provision that corresponds to NYSE
Rule 322. Accordingly, the requirements of proposed FINRA Rule 4150
would be new to non-NYSE members.
\11\ FINRA noted that the term ``obligations'' includes
financial obligations, as well as other obligations that may have a
financial impact on a member, such as performance obligations.
\12\ NASD Rule 0120(n) defines ``person'' to include any natural
person, partnership, corporation, association, or other legal
entity. Similarly, NYSE Rule 2(d) states that ``person'' means a
natural person, corporation, limited liability company, partnership,
association, joint stock company, trust, fund or any organized group
of persons whether incorporated or not. All references to
``persons'' in this filing include entities.
\13\ FINRA notes the proposed rule is designed to align with the
requirements of Appendix C.
---------------------------------------------------------------------------
(B) Proposed FINRA Rule 4311 (Carrying Agreements)
Proposed FINRA Rule 4311 is based on NASD Rule 3230 and NYSE Rule
382.\14\ The proposed rule governs the requirements applicable to
members when entering into agreements for the carrying of any customer
accounts in which securities transactions can be effected.
Historically, the purpose of the NASD and NYSE rules upon which the
proposed rule is based has been to ensure that certain functions and
responsibilities are clearly allocated to either the introducing or
carrying firm, consistent with the requirements of the self-regulatory
organization and SEC's financial responsibility and other rules and
regulations, as applicable.\15\
---------------------------------------------------------------------------
\14\ Proposed FINRA Rule 4311 also is based on NYSE Rule
Interpretations 382/01 through/05 and 409(a)/01.
\15\ See, e.g., Notice to Members 94-7 (February 1994) (SEC
Approves New NASD Rule Relating to the Obligations and
Responsibilities of Introducing and Clearing Firms) and NYSE
Information Memo 82-18 (March 1982) (Carrying Agreements--Amendments
to Rules 382 and 405).
---------------------------------------------------------------------------
As discussed in the Notice, Proposed FINRA Rule 4311(a)(1)
prohibits a member, unless otherwise permitted by FINRA, from entering
into an agreement for the carrying on an omnibus or fully disclosed
basis, of any customer account in which securities transactions can be
effected, unless the agreement is with a carrying firm that is a FINRA
member.
Proposed FINRA Rule 4311(b)(1) requires that the carrying firm must
submit to FINRA for prior approval any agreement for the carrying of
accounts, whether on an omnibus or fully disclosed basis, before such
agreement may become effective.\16\ The proposed rule also provides
that the carrying firm must submit to FINRA for prior approval any
material changes to an approved carrying agreement before the changes
may become effective. The proposed rule codifies the practice under
NASD Rule 3230 of permitting use of pre-approved standardized forms of
agreement, with the exception of agreements with parties that are not
U.S.-registered broker-dealers. The proposed rule requires a carrying
firm to submit to FINRA for approval each carrying agreement with a
non-U.S.-registered broker-dealer.
---------------------------------------------------------------------------
\16\ Proposed FINRA Rule 4311(b)(1) is consistent with the
requirements of NASD Rule 3230(e) and NYSE Rule 382(a).
---------------------------------------------------------------------------
FINRA Rule 4311(b)(3) codifies the current practice under NYSE Rule
382 of requiring that as early as possible, but
[[Page 12382]]
not later than 10 business days, prior to the carrying of any accounts
of a new introducing firm (including the accounts of any piggyback or
intermediary introducing firm(s)), the carrying firm must submit to
FINRA a notice identifying each such introducing firm by name and CRD
number and include such additional information as FINRA may
require.\17\ FINRA Rule 4311(b)(4) expressly requires each carrying
firm to conduct appropriate due diligence with respect to any new
introducing firm relationship. The rule provides that such due
diligence must assess the financial, operational, credit and
reputational risk that such arrangement will have upon the carrying
firm. The rule also provides that FINRA, in its review of any
arrangement, may in its discretion require specific items to be
addressed by the carrying firm as part of the firm's due diligence
requirement under the rule. The rule further provides that the carrying
firm must maintain a record, in accord with the time frames prescribed
by Exchange Act Rule 17a-4(b), of the due diligence conducted for each
new introducing firm.
---------------------------------------------------------------------------
\17\ This is a new requirement for non-NYSE carrying members,
and permits FINRA to obtain additional information that enables it
to evaluate the impact of the new carrying arrangement on the
financial and operational condition of the member.
---------------------------------------------------------------------------
Proposed FINRA Rule 4311(c) requires that each carrying agreement
in which accounts are to be carried on a fully disclosed basis must
specify the responsibilities of each party to the agreement.\18\ The
proposed rule also requires each carrying agreement in which accounts
are to be carried on a fully disclosed basis to expressly allocate to
the carrying firm the responsibility for preparing and transmitting
statements of account to customers.
---------------------------------------------------------------------------
\18\ Proposed FINRA Rule 4311(c) is based in part on NASD Rule
3230(a) and NYSE Rule 382(b).
---------------------------------------------------------------------------
FINRA Proposed Rule 4311(d) requires that each customer whose
account is introduced on a fully disclosed basis must be notified in
writing upon the opening of the account of the existence of the
carrying agreement and the responsibilities allocated to each
respective party.\19\
---------------------------------------------------------------------------
\19\ Proposed FINRA Rule 4311(d) is based in part on NASD Rule
3230(g), NYSE Rule 382(c), and NYSE Rule Interpretation 382/03.
---------------------------------------------------------------------------
Proposed FINRA Rule 4311(e) requires that each carrying agreement
must expressly state that to the extent that a particular
responsibility is allocated to one party, the other party or parties
will supply to the responsible organization all appropriate data in
their possession pertinent to the proper performance and supervision of
that responsibility.\20\
---------------------------------------------------------------------------
\20\ This is a new requirement for non-NYSE members.
---------------------------------------------------------------------------
Proposed FINRA Rule 4311(f) provides that a carrying agreement may
authorize an introducing firm to issue negotiable instruments directly
to its customers on the carrying firm's behalf, using instruments for
which the carrying firm is the maker or drawer, provided that the
parties comply with Exchange Act Rule 15c3-3 and further that the
introducing firm represents to the carrying firm in writing that the
introducing firm maintains, and will enforce, supervisory policies and
procedures with respect to such negotiable instruments that are
satisfactory to the carrying firm.\21\
---------------------------------------------------------------------------
\21\ Proposed FINRA Rule 4311(f) is based in part on NASD Rule
3230(d) and NYSE Rule 382(f).
---------------------------------------------------------------------------
Proposed FINRA Rules 4311(g) and 4311(h) generally address
obligations of parties to provide referenced information, such as any
written customer complaints and exception reports, to each other and/or
to FINRA and are based upon existing NASD and NYSE rule provisions.
Proposed FINRA Rule 4311(i) provides that all carrying agreements
must require each introducing firm to maintain its proprietary and
customer accounts, and the proprietary and customer accounts of any
introducing firm for which it is acting as an intermediary in obtaining
clearing services from the carrying firm, in such a manner as to enable
the carrying firm and FINRA to specifically identify the proprietary
and customer accounts belonging to each introducing firm.\22\
---------------------------------------------------------------------------
\22\ Proposed FINRA Rule 4311(i) is based largely on NASD Rule
3230(h) and does not have a corresponding provision in NYSE Rule
382.
---------------------------------------------------------------------------
(C) Proposed FINRA Rule 4522 (Periodic Security Counts, Verifications
and Comparisons)
Proposed FINRA Rule 4522(a) requires each member firm that is
subject to the requirements of Exchange Act Rule 17a-13 to make the
counts, examinations, verifications, comparisons, and entries set forth
in that rule.\23\ Proposed FINRA Rule 4522(b) requires each carrying or
clearing member subject to Exchange Act Rule 17a-13 to make more
frequent counts, examinations, verifications, comparisons, and entries
where prudent business practice would so require.\24\
---------------------------------------------------------------------------
\23\ Proposed FINRA Rule 4522(a) is based in part on NYSE Rule
440.10.
\24\ Id.
---------------------------------------------------------------------------
(D) Proposed FINRA Rule 4523 (Assignment of Responsibility for General
Ledger Accounts and Identification of Suspense Accounts)
Proposed FINRA Rule 4523 is intended to help assure the accuracy of
each member's books and records.\25\ Proposed FINRA Rule 4523(a)
requires that each member must designate an associated person to be
responsible for each general ledger bookkeeping account and account of
similar function used by the member. The associated person must control
and oversee entries into each such account and determine that the
account is current and accurate as necessary to comply with all
applicable FINRA rules and federal securities laws governing books and
records and financial responsibility requirements.
---------------------------------------------------------------------------
\25\ Proposed FINRA Rule 4523 is based on NYSE Rule 440.20. NASD
Rules do not have a provision that corresponds to NYSE Rule 440.20;
therefore, the requirements of proposed FINRA Rule 4523 are new to
non-NYSE members.
---------------------------------------------------------------------------
Proposed FINRA Rule 4523(b) requires that each carrying or clearing
member must maintain a record of the name of each individual assigned
primary and supervisory responsibility for each account as required by
paragraph (a) of the rule.
Proposed FINRA Rule 4523(c) provides that each member must record,
in an account that must be clearly identifiable as a suspense account,
money charges or credits and receipts or deliveries of securities whose
ultimate disposition is pending determination.
(E) Implementation Date
FINRA will announce the implementation date of these proposed rule
changes in a Regulatory Notice to be published no later than 90 days
following Commission approval. The implementation date will be no later
than 120 days following publication of the Regulatory Notice announcing
Commission approval.
III. Summary of Comment Letter and FINRA's Response
The proposed rule change was published for comment in the Federal
Register on November 24, 2010, and the comment period closed on
December 22, 2010. The Commission received one comment letter in
response to the proposing release, the Arnold & Porter letter.\26\
Arnold & Porter expressed concerns about the scope of proposed FINRA
Rule 4311. Specifically, the commenter suggested that proposed FINRA
Rule 4311 was not clear as to whether a FINRA member firm that
[[Page 12383]]
operates pursuant to the exemptive provision of Exchange Act Rule 15c3-
3(k)(2)(i) is engaged in carrying activity and, thereby, subject to the
rule. In FINRA's response, it noted that FINRA had specified in the
rule text where appropriate those requirements of the proposed rule
which are intended to apply to firms that operate pursuant to the
exemptive provisions of Exchange Act Rule 15c3-3(k)(2)(i).\27\
---------------------------------------------------------------------------
\26\ See supra note 4.
\27\ See also Notice, note 6, at FR 74760 (stating, ``[f]or
purposes of the new consolidated financial responsibility rules and
the proposed rules, FINRA has specified in the rule text where
appropriate that all requirements that apply to a member that clears
or carries customer accounts also apply to any member that,
operating pursuant to the exemptive provisions of SEA Rule 15c3-
3(k)(2)(i), either clears customer transactions pursuant to such
exemptive provisions or holds customer funds in a bank account
established thereunder.'').
---------------------------------------------------------------------------
The Arnold & Porter letter also raised concerns as to whether
proposed FINRA Rule 4311 impacts the status of DVP/RVP clearance and
settlement arrangements across international borders that may be
structured as omnibus accounts where U.S.-registered broker-dealers
seek to designate these accounts at a foreign affiliate as approved
foreign control locations under Exchange Act Rule 15c3-3. As FINRA
stated in its response, the proposed rule applies to arrangements to
carry customer accounts and is ``not meant to address the substantive
requirements of SEA Rule 15c3-3(c) as it applies to good control
locations nor to apply to cross-border clearance and settlement
arrangements that are structured on a basis that is permissible under
and consistent with SEC rules.'' \28\
---------------------------------------------------------------------------
\28\ See Response to Comments.
---------------------------------------------------------------------------
Finally, FINRA noted that the propriety of structuring cross-border
clearance and settlement arrangements in the manner described by the
commenter, and the propriety of a U.S.-registered broker-dealer's
reliance on Exchange Act Rule 15c3-3(k)(2)(i) for various business
activities, were outside the scope of the proposed rule change.\29\
---------------------------------------------------------------------------
\29\ Id.
---------------------------------------------------------------------------
IV. Discussion and Commission Findings
The Commission has carefully considered the proposed rule change,
as modified by Amendment No. 1, the comment letter received, and
FINRA's response, and finds that the proposed rule change is consistent
with the requirements of the Exchange Act and the rules and regulations
thereunder that are applicable to a national securities
association.\30\ In particular, the Commission finds that the proposal
is consistent with Section 15A(b)(6) of the Exchange Act,\31\ which
requires, among other things, that the rules of a national securities
association be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, protect investors and the
public interest.
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\30\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
\31\ 15 U.S.C. 78o-3(b)(6).
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The Commission believes that FINRA adequately addressed the
concerns raised by the commenter in its response. Further, the rule
language in Amendment No. 1 reminds FINRA members that, for purposes of
paragraphs (c)(1)(F) and (c)(2) of Rule 4311, the receipt and delivery
of customers' funds and securities and the safeguarding of such funds
and securities must comply with the requirements of the SEC's financial
responsibility rules, in particular Exchange Act Rule 15c3-3 and
applicable SEC guidance. The Commission believes the proposed rule
change, as modified by Amendment No. 1, will further the purposes of
the Exchange Act by, among other things, clarifying and streamlining
the requirements surrounding carrying agreements, as well as the rules
governing guarantees, security counts, and supervision of general
ledger accounts.
V. Accelerated Approval
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Exchange Act,\32\ for approving the proposed rule change, as
modified by Amendment No. 1 thereto, prior to the 30th day after
publication of Amendment No. 1 in the Federal Register. The changes
proposed in Amendment No. 1 add clarity to Rule 4311 and do not raise
novel regulatory concerns. In particular, Amendment No. 1 further
reminds FINRA members that, for purposes of paragraphs (c)(1)(F) and
(c)(2) of Rule 4311, receipt and delivery of customers' funds and
securities and the safeguarding of such funds and securities must
comply with the requirements of the SEC's financial responsibility
rules, in particular Exchange Act Rule 15c3-3 and applicable SEC
guidance.
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\32\ 15 U.S.C. 78s(b)(2).
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Accordingly, the Commission finds that good cause exists to approve
the proposal, as modified by Amendment No. 1, on an accelerated basis.
VI. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 1
to the proposed rule change is consistent with the Exchange 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-2010-061 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-2010-061. 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 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-2010-061 and should be submitted on or before March 28, 2011.
[[Page 12384]]
VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\33\ that the proposed rule change (SR-FINRA-2010-061), as
modified by Amendment No. 1, be, and hereby is, approved on an
accelerated basis.
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\33\ 15 U.S.C. 78(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-5024 Filed 3-4-11; 8:45 am]
BILLING CODE 8011-01-P
