Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Amend FINRA Rule 5131 (New Issue Allocations and Distributions), 72946-72949 [2013-28975]

Download as PDF 72946 Federal Register / Vol. 78, No. 233 / Wednesday, December 4, 2013 / Notices seller and selling to the buyer at the same price. Trading Outside Normal Market Hours Under the proposed amendments to Rule 12.6, a Member generally could limit the life of a customer order to the period of normal market hours of 9:30 a.m. to 4:00 p.m. Eastern Time. However, if the customer and Member agreed to the processing of the customer’s order outside normal market hours, the protections of Rule 12.6, as amended, would apply to that customer’s order at all times the customer order is executable by the Member. EMCDONALD on DSK67QTVN1PROD with NOTICES III. Discussion and Commission Findings After careful review of the proposed rule change, the Commission finds that the Exchange’s proposal is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange.9 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,10 which requires that the rules of a national securities exchange be designed, among other things, 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 Commission believes that the proposed rule change, which is designed to establish a single standard to protect customer orders from member firms trading ahead of those orders, will help assure the protection of customer orders without imposing undue regulatory costs on industry participants. Moreover, the Commission believes that the proposed rule change will define important parameters by which Members must abide when trading proprietarily while holding customer orders. In addition, because the Exchange is proposing to make its customer order protection rule substantially similar to the customer order protection rules of FINRA 11 and other exchanges,12 the Commission 9 In approving the BYX proposed rule change, the Commission has considered its impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f). 10 15 U.S.C. 78f(b)(5). 11 See FINRA Rule 5320, supra note 5. 12 Several national securities exchanges submitted proposed rule changes to adopt customer order protection rules that are substantially similar to FINRA Rule 5320. See, e.g., Securities Exchange Act Release No. 64418 (May 6, 2011), 76 FR 27735 (May 12, 2011) (SR–CHX–2011–08); Securities VerDate Mar<15>2010 17:09 Dec 03, 2013 Jkt 232001 believes that the proposed rule change will help reduce the complexity of the customer order protection rules for those firms subject to these rules. Taken together, the proposed rule change should provide Members with clarity and guidance and thereby promote the efficient functioning of the securities markets. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,13 that the proposed rule change (SR–BYX–2013– 036) be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.14 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–28968 Filed 12–3–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–70957; File No. SR–FINRA– 2013–037] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Amend FINRA Rule 5131 (New Issue Allocations and Distributions) November 27, 2013. I. Introduction On August 23, 2013, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend FINRA Rule 5131 (New Issue Allocations and Distributions) to provide a limited exception to allow members to rely on written representations from certain accounts to comply with Rule 5131(b). The proposed rule change was Exchange Act Release No. 65165 (August 18, 2011), 76 FR 53009 (August 24, 2011) (SR–NYSEAmex– 2011–59); Securities Exchange Act Release No. 65166 (August 18, 2011), 76 FR 53012 (August 24, 2011) (SR–NYSEArca–2011–57); Securities Exchange Act Release No. 69504 (May 2, 2013), 78 FR 26828 (May 8, 2013) (SR–CBOE–2013–027); and Securities Exchange Act Release No. 70011 (July 19, 2013), 78 FR 44994 (July 25, 2013) (SR–CBOE– 2013–074). 13 15 U.S.C. 78s(b)(2). 14 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 published for comment in the Federal Register on September 10, 2013.3 The Commission received two comment letters in response to the proposed rule change.4 On November 22, 2013, FINRA filed Amendment No. 1 with the Commission to respond to the comment letters and to propose a clarifying modification to the proposed exception regarding the eligibility of an unaffiliated private fund where a control person of the fund’s investment adviser also is a beneficial owner in the fund. The Commission is publishing this notice and order to solicit comments on Amendment No. 1 and to approve the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. II. Description of Proposal On August 23, 2013, FINRA filed the Original Proposal to amend FINRA Rule 5131 to provide a limited exception to allow members to rely on written representations from certain accounts in complying with FINRA Rule 5131(b) (the ‘‘spinning provision’’).5 FINRA Rule 5131 addresses abuses in the allocation and distribution of ‘‘new issues,’’ 6 and paragraph (b) prohibits the practice of ‘‘spinning,’’ which refers to an underwriter’s allocation of new issue shares to executive officers and directors of a company as an inducement to award the underwriter with investment banking business, or as consideration for investment banking business previously awarded. The spinning provision generally provides that no member or person associated with a member may allocate shares of a new issue to any account in which an executive officer or director of a public company 7 or a covered nonpublic company,8 or a person materially 3 See Securities Exchange Act Release No. 70312 (Sept. 4, 2013), 78 FR 55322 (Sept. 10, 2013) (Notice of Filing of SR–FINRA–2013–037) (‘‘Original Proposal’’). The comment period ended on October 1, 2013. 4 See letter to Elizabeth M. Murphy, Secretary, Commission, from William G. Mulligan, CEO, Cordium US., dated Oct. 1, 2013 (‘‘Cordium letter’’); and letter to Elizabeth M. Murphy, Secretary, Commission, from Stuart J. Kaswell, Executive Vice President & Managing Director, Managed Funds Association, dated Sept. 30, 2013 (‘‘MFA letter’’). The letters are available on the Commission’s Web site at https://www.sec.gov/comments/sr-finra-2013037/finra2013037.shtml. 5 See supra note 3. 6 The term ‘‘new issue’’ has the same meaning as in Rule 5130(i)(9). See Rule 5130(i)(9). 7 A ‘‘public company’’ is any company that is registered under Section 12 of the Act or files periodic reports pursuant to Section 15(d) thereof. See Rule 5131(e)(1). 8 The term ‘‘covered non-public company’’ means any non-public company satisfying the following criteria: (i) Income of at least $1 million in the last fiscal year or in two of the last three fiscal years E:\FR\FM\04DEN1.SGM 04DEN1 Federal Register / Vol. 78, No. 233 / Wednesday, December 4, 2013 / Notices EMCDONALD on DSK67QTVN1PROD with NOTICES supported 9 by such executive officer or director, has a beneficial interest 10 if such public company or covered nonpublic company has certain current, recent or anticipated investment banking relationships with the member. Rule 5131.02 (Annual Representation) provides that, for the purposes of the spinning provision, a member may rely on a written representation obtained within the prior 12 months from the beneficial owner(s) of an account, or a person authorized to represent the beneficial owner(s), as to whether such beneficial owner(s) is an executive officer or director or person materially supported by an executive officer or director and if so, the company on whose behalf such executive officer or director serves. Therefore, to comply with the spinning provision, firms typically issue questionnaires to their customers to ascertain whether any of the persons covered by the spinning provision has a beneficial interest in the account. Under the spinning provision, whether an account in which an executive officer or director of a company (or person materially supported by such executive officer or director) has a beneficial interest will be eligible to purchase shares of a new issue will depend upon whether the company is a current, recent or prospective investment banking client of the firm, as set forth in the rule. Where an executive officer or director of a company (or a person materially supported by such executive officer or director) has a beneficial interest in an account, a member must also be able to identify the company on whose behalf such executive officer or director serves to determine whether the company is a current, recent or prospective investment banking client of the firm under the rule; if the member is unable to obtain such information, it has to resort to restricting all new issue allocations to such account, which is not the intended purpose of the rule. The spinning provision went into effect on September 26, 2011. and, since then, FINRA has received feedback from industry participants that obtaining the information necessary to ensure and shareholders’ equity of at least $15 million; (ii) shareholders’ equity of at least $30 million and a two-year operating history; or (iii) total assets and total revenue of at least $75 million in the latest fiscal year or in two of the last three fiscal years. See Rule 5131(e)(3). 9 ‘‘Material support’’ means directly or indirectly providing more than 25% of a person’s income in the prior calendar year. Persons living in the same household are deemed to be providing each other with material support. See Rule 5131(e)(6). 10 The term ‘‘beneficial interest’’ has the same meaning as in Rule 5130(i)(1). See Rule 5130(i)(1). VerDate Mar<15>2010 17:09 Dec 03, 2013 Jkt 232001 compliance with the rule, and eligibility for the de minimis exception, has proved difficult.11 In particular, FINRA understands that members (and their customers) have had difficulty obtaining, tracking and aggregating information from funds regarding indirect beneficial owners, such as participants in a fund of funds (‘‘FOF’’), for use in determining an account’s eligibility for the de minimis exception and that this has resulted in compliance difficulties and restrictions, including in situations where the ability of an underwriter to confer any meaningful financial benefit to a particular investor by allocating new issue shares to the account is impracticable.12 Thus, in the Original Proposal, FINRA proposed a limited exception from the spinning provision, subject to a set of conditions, designed to ensure the important protections of Rule 5131(b) continue to be preserved, while offering meaningful relief for members and investors in situations where spinning abuse is not likely. Specifically, the Original Proposal provided that members may rely upon a written representation obtained within the prior 12 months from a person authorized to represent an account that does not look through to the beneficial owners of a fund invested in the account, provided that such fund: • Is a ‘‘private fund’’ as defined in the Investment Advisers Act of 1940; • is managed by an investment adviser; • has assets greater than $50 million; • owns less than 25% of the account and is not a fund in which a single investor has a beneficial interest of 25% or more; • is ‘‘unaffiliated’’ with the account in that the private fund’s investment adviser does not have a control person in common with the account’s investment adviser; and • was not formed for the specific purpose of investing in the account. The Original Proposal also required that, to be eligible for the exception, the unaffiliated private fund may not have a beneficial owner that also is a control person of such fund’s investment adviser. The text of the proposed rule change is available on FINRA’s Web site at 11 Among other exceptions, Rule 5131(b)(2) provides a de minimis exception for new issue allocations to any account in which the beneficial interests of executive officers and directors of a company subject to the rule, and persons materially supported by such executive officers and directors, do not exceed in the aggregate 25% of such account. 12 For example, members have noted that brokerdealers normally do not know the identity of the beneficial owners of the fund of funds invested in the account. PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 72947 https://www.finra.org, at the principal office of FINRA, and at the Commission’s Public Reference Room. III. Summary of Comments, FINRA’s Response and Amendment No. 1 As stated above, the Commission received two comment letters in response to the Original Proposal.13 Both commenters strongly support the adoption of the proposed amendment and stated that the proposed rule would ease the tracking burden for allocations to accounts that do not raise the concerns the spinning rule is designed to address, while also preserving the efficacy of the rule.14 However, the commenters also suggest certain modifications that they believe improve the usefulness of the proposed exception without compromising the objectives of the rule.15 Both commenters asked that FINRA eliminate the proposed condition that the unaffiliated private fund must not have a beneficial owner that also is a control person of such fund’s investment adviser.16 The commenters noted that it is not uncommon for an FOF to have an investor that is both a beneficial owner of the FOF and a control person of such fund’s investment adviser.17 One commenter noted that investment in the fund by a control person serves the purpose of aligning the interests of a control person with the interests of the fund’s investors and, therefore, is a practice that institutional investors often require from fund managers.18 The other commenter stated that this condition does not further the purposes of the spinning rule and recommended eliminating this aspect of the proposal.19 As an alternative, one commenter recommended that, rather than excluding funds with a beneficial owner that also is a control person of the investment adviser, the proposal instead should be amended to provide that a member may rely upon a written representation obtained within the prior 12 months from a person authorized to represent an account that does not look through to the beneficial owners of a fund invested in the account (other than a beneficial owner that is a control person of the investment adviser to such private fund), subject to the other 13 See 14 See supra note 4. Cordium letter and MFA letter. 15 Id. 16 Id. 17 Id. 18 See 19 See E:\FR\FM\04DEN1.SGM MFA letter. Cordium letter. 04DEN1 EMCDONALD on DSK67QTVN1PROD with NOTICES 72948 Federal Register / Vol. 78, No. 233 / Wednesday, December 4, 2013 / Notices proposed conditions.20 FINRA agrees with this comment and, therefore, proposed a clarifying amendment to delete the proposed condition that the unaffiliated private fund must not have a beneficial owner that also is a control person of such fund’s investment adviser and, instead, to include language substantially similar to that suggested by the commenter.21 Therefore, where a beneficial owner also is a control person of the FOF’s adviser, a member must ascertain whether such person is a covered person based upon the standards set forth in Rule 5131(b). If a member obtains a written representation from an account that a beneficial owner in an unaffiliated private fund is a control person of such fund’s investment adviser, but is not a covered person under the spinning provision, an allocation to such account would still be eligible for the proposed exception, if the conditions, as amended, are met. If a beneficial owner in an unaffiliated private fund is both a control person and a covered person under the spinning provision, a new issue allocation to such covered persons would be impermissible, unless such allocation is permitted under another exception (e.g., the de minimis exception).22 As stated above, the commenters noted that it is not uncommon for an FOF to have an investor that is both a beneficial owner of the FOF and a control person of such fund’s investment adviser. Therefore, the Original Proposal would not have provided the intended relief for members in many cases where the efficacy of the spinning provision would still be preserved. Thus, instead of eliminating eligibility for the exception for any FOF with a beneficial owner that also is a control person of such fund’s investment adviser, the revised proposal would permit a member to avail itself of the exception with respect to other beneficial owners (that are not also control persons of the FOF’s investment adviser). FINRA believes that this revision to the proposal strikes the proper balance between members’ concerns regarding the difficulty of identifying indirect beneficial owners of an account and preserving the important protections of Rule 5131(b). One commenter also recommended that FINRA either reduce or eliminate the proposal’s condition that, to be eligible under the exception, the unaffiliated private fund must have 20 See MFA letter. MFA letter. 22 See supra note 11. 21 See VerDate Mar<15>2010 17:09 Dec 03, 2013 Jkt 232001 assets greater than $50 million.23 This commenter believes that the percentage ownership threshold conditions, which require that the unaffiliated private fund own less than 25% of the account and does not have a single investor with a beneficial interest of 25% or more, along with the other conditions, are sufficient to ensure that spinning would be unlikely.24 FINRA is of the view that the percentage ownership threshold conditions alone are not sufficient to ensure that the protections of the spinning rule are preserved and, therefore, continues to believe that the ‘‘assets greater than $50 million’’ component is an appropriate additional safeguard. Specifically, FINRA believes that this requirement helps ensure a sufficient degree of dilution that would reduce the economic meaningfulness to a potentially covered person of any single IPO allocation, and therefore, does not propose eliminating or reducing this condition at this time. FINRA will announce the effective date of the proposed rule change in a Regulatory Notice to be published no later than 60 days following Commission approval. The effective date will be no later than 120 days following Commission approval. IV. Commission Findings After carefully considering the proposed rule change, as modified by Amendment No. 1, the comments submitted, and FINRA’s responses to the comments, the Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association.25 In particular, the Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with Section 15A(b)(6) of the Act,26 which requires, among other things, that FINRA rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. Specifically, the Commission believes that the proposed exception and required conditions, as amended, are consistent with the provisions of the Act noted above by promoting capital formation and aiding member 23 See Cordium letter. Cordium letter. 25 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). 26 15 U.S.C. 78o–3(b)(6). 24 See PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 compliance efforts, while maintaining investor confidence in the capital markets. In simplifying and clarifying the operation of the proposed exception for FINRA members and other industry participants, the Commission believes that the proposed rule change, as modified by Amendment No. 1, reasonably balances the compliance concerns and the burdens noted by the industry while preserving the efficacy of the spinning provision and FINRA’s goal of assuring that the rule continues to be designed to promote capital formation and investor confidence and prevent fraudulent and manipulative behaviors. In addition, the Commission does not believe that the proposed rule change, as modified by Amendment No. 1, will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act in that the proposed rule change provides an exception to Rule 5131(b) for accounts with unaffiliated private fund investors that face special difficulties under the existing exceptions from the rule, and thus reduces differential impacts of the rule without compromising the objectives of the spinning provision. The Commission believes that FINRA adequately addressed the comments raised in response to FINRA’s notice. V. Accelerated Approval The Commission finds good cause, pursuant to Section 19(b)(2) of the Act,27 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 respond to the comment letters received by the Commission in response to the Original Proposal and further simplify the operation of the spinning provision for members and other industry participants.28 In addition, accelerating approval of this proposed rule change, as modified by Amendment No. 1, should benefit FINRA members by aiding member compliance efforts while preserving the efficacy of the spinning provision and should benefit investors by maintaining investor protection in the capital markets. VI. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change, as modified by Amendment No. 27 15 U.S.C. 78s(b)(2). MFA letter. See also Cordium letter. 28 See E:\FR\FM\04DEN1.SGM 04DEN1 Federal Register / Vol. 78, No. 233 / Wednesday, December 4, 2013 / Notices 1, is consistent with the Act. Comments may be submitted by any of the following methods: For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.30 Electronic Comments Kevin M. O’Neill, Deputy Secretary. • Use the Commission’s Internet comment form (https://sec.gov/rules/ sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– FINRA–2013–037 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. EMCDONALD on DSK67QTVN1PROD with NOTICES All submissions should refer to File Number SR–FINRA–2013–037. This file number should be included on the subject line if email 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 person 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–2013–037 and should be submitted on or before December 26, 2013. U.S.C. 78s(b)(2). 17:09 Dec 03, 2013 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–70952; File No. SR–BATS– 2013–056] Self-Regulatory Organizations; BATS Exchange, Inc.; Order Approving a Proposed Rule Change To Amend Rule 12.6 To Conform to FINRA Rule 5320 Relating to Trading Ahead of Customer Orders November 27, 2013. I. Introduction On October 3, 2013, BATS Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BATS’’) filed with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend BATS Rule 12.6 (‘‘Rule 12.6’’) to make it substantially similar to Financial Industry Regulatory Authority (‘‘FINRA’’) Rule 5320. The proposed rule change was published for comment in the Federal Register on October 22, 2013.3 The Commission received no comments on the proposal. This order approves the proposed rule change. II. Description of the Proposed Rule Change The Exchange proposes to amend Rule 12.6, which limits trading ahead of customer orders by Members,4 to have the rule substantially conform to FINRA Rule 5320.5 As with FINRA Rule 5320, the proposed amendments to Rule 12.6 would prohibit Members from trading ahead of customer orders, subject to specified exceptions. Rule 12.6, as proposed to be amended, would include exceptions for large orders and institutional accounts, proprietary transactions effected by a trading unit of CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 70662 (October 11, 2013), 78 FR 62828 (SR–BATS–2013– 056) (‘‘Notice’’). 4 Members are registered brokers or dealers that have been admitted to membership at the Exchange. BATS Rule 1.5(n). 5 See Securities Exchange Act Release No. 63895 (February 11, 2011), 76 FR 9386 (February 17, 2011) (SR–FINRA–2009–90). 1 15 It is therefore ordered pursuant to Section 19(b)(2) of the Act,29 that the proposed rule change (SR–FINRA– 2013–037), as modified by Amendment No. 1, be and hereby is approved on an accelerated basis. VerDate Mar<15>2010 BILLING CODE 8011–01–P 30 17 VII. Conclusion 29 15 [FR Doc. 2013–28975 Filed 12–3–13; 8:45 am] Jkt 232001 PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 72949 a Member with no knowledge of customer orders held by another trading unit of the Member, riskless principal transactions, intermarket sweep orders (‘‘ISOs’’), and odd lot and bona fide error transactions, described below. Rule 12.6 also would provide the same guidance as FINRA Rule 5320 with respect to minimum price improvement standards, order handling procedures, and trading outside normal market hours. Background Current Rule 12.6, the customer order protection rule, generally prohibits Members from trading on a proprietary basis ahead of, or along with, customer orders that are executable at the same price as the proprietary order. The current rule contains several exceptions that make it permissible for a Member to enter a proprietary order while representing a customer order that could be executed at the same price, including permitting transactions for the purpose of facilitating the execution, on a riskless principal basis, of one or more customer orders. Proposal To Adopt Text of FINRA Rule 5320 To harmonize its rules with FINRA, the Exchange proposes to delete the current text of Rule 12.6 and its supplementary material and adopt the text and supplementary material of FINRA Rule 5320, with certain changes, as Rule 12.6. FINRA Rule 5320 generally provides that a FINRA member that accepts and holds an order in an equity security for its own customer, or a customer of another broker-dealer, without immediately executing the order is prohibited from trading that security on the same side of the market for its own account at a price that would satisfy the customer order, unless it immediately thereafter executes the customer order up to the size and at the same or better price at which it traded for its own account. Exceptions The proposed amendments to Rule 12.6 would include exceptions to the prohibition against trading ahead of customer orders. A Member that meets the conditions of an exception would be permitted to trade a security on the same side of the market for its own account at a price that would satisfy a customer order in certain circumstances. The exceptions are set forth below. Large Orders and Institutional Accounts One exception would permit a Member to negotiate terms and E:\FR\FM\04DEN1.SGM 04DEN1

Agencies

[Federal Register Volume 78, Number 233 (Wednesday, December 4, 2013)]
[Notices]
[Pages 72946-72949]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28975]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70957; File No. SR-FINRA-2013-037]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, To Amend FINRA Rule 5131 (New Issue Allocations and 
Distributions)

November 27, 2013.

I. Introduction

    On August 23, 2013, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend FINRA Rule 5131 (New Issue Allocations 
and Distributions) to provide a limited exception to allow members to 
rely on written representations from certain accounts to comply with 
Rule 5131(b). The proposed rule change was published for comment in the 
Federal Register on September 10, 2013.\3\ The Commission received two 
comment letters in response to the proposed rule change.\4\ On November 
22, 2013, FINRA filed Amendment No. 1 with the Commission to respond to 
the comment letters and to propose a clarifying modification to the 
proposed exception regarding the eligibility of an unaffiliated private 
fund where a control person of the fund's investment adviser also is a 
beneficial owner in the fund. The Commission is publishing this notice 
and order to solicit comments on Amendment No. 1 and to approve the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 70312 (Sept. 4, 
2013), 78 FR 55322 (Sept. 10, 2013) (Notice of Filing of SR-FINRA-
2013-037) (``Original Proposal''). The comment period ended on 
October 1, 2013.
    \4\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
from William G. Mulligan, CEO, Cordium US., dated Oct. 1, 2013 
(``Cordium letter''); and letter to Elizabeth M. Murphy, Secretary, 
Commission, from Stuart J. Kaswell, Executive Vice President & 
Managing Director, Managed Funds Association, dated Sept. 30, 2013 
(``MFA letter''). The letters are available on the Commission's Web 
site at https://www.sec.gov/comments/sr-finra-2013-037/finra2013037.shtml.
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II. Description of Proposal

    On August 23, 2013, FINRA filed the Original Proposal to amend 
FINRA Rule 5131 to provide a limited exception to allow members to rely 
on written representations from certain accounts in complying with 
FINRA Rule 5131(b) (the ``spinning provision'').\5\
---------------------------------------------------------------------------

    \5\ See supra note 3.
---------------------------------------------------------------------------

    FINRA Rule 5131 addresses abuses in the allocation and distribution 
of ``new issues,'' \6\ and paragraph (b) prohibits the practice of 
``spinning,'' which refers to an underwriter's allocation of new issue 
shares to executive officers and directors of a company as an 
inducement to award the underwriter with investment banking business, 
or as consideration for investment banking business previously awarded.
---------------------------------------------------------------------------

    \6\ The term ``new issue'' has the same meaning as in Rule 
5130(i)(9). See Rule 5130(i)(9).
---------------------------------------------------------------------------

    The spinning provision generally provides that no member or person 
associated with a member may allocate shares of a new issue to any 
account in which an executive officer or director of a public company 
\7\ or a covered non-public company,\8\ or a person materially

[[Page 72947]]

supported \9\ by such executive officer or director, has a beneficial 
interest \10\ if such public company or covered non-public company has 
certain current, recent or anticipated investment banking relationships 
with the member.
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    \7\ A ``public company'' is any company that is registered under 
Section 12 of the Act or files periodic reports pursuant to Section 
15(d) thereof. See Rule 5131(e)(1).
    \8\ The term ``covered non-public company'' means any non-public 
company satisfying the following criteria: (i) Income of at least $1 
million in the last fiscal year or in two of the last three fiscal 
years and shareholders' equity of at least $15 million; (ii) 
shareholders' equity of at least $30 million and a two-year 
operating history; or (iii) total assets and total revenue of at 
least $75 million in the latest fiscal year or in two of the last 
three fiscal years. See Rule 5131(e)(3).
    \9\ ``Material support'' means directly or indirectly providing 
more than 25% of a person's income in the prior calendar year. 
Persons living in the same household are deemed to be providing each 
other with material support. See Rule 5131(e)(6).
    \10\ The term ``beneficial interest'' has the same meaning as in 
Rule 5130(i)(1). See Rule 5130(i)(1).
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    Rule 5131.02 (Annual Representation) provides that, for the 
purposes of the spinning provision, a member may rely on a written 
representation obtained within the prior 12 months from the beneficial 
owner(s) of an account, or a person authorized to represent the 
beneficial owner(s), as to whether such beneficial owner(s) is an 
executive officer or director or person materially supported by an 
executive officer or director and if so, the company on whose behalf 
such executive officer or director serves. Therefore, to comply with 
the spinning provision, firms typically issue questionnaires to their 
customers to ascertain whether any of the persons covered by the 
spinning provision has a beneficial interest in the account.
    Under the spinning provision, whether an account in which an 
executive officer or director of a company (or person materially 
supported by such executive officer or director) has a beneficial 
interest will be eligible to purchase shares of a new issue will depend 
upon whether the company is a current, recent or prospective investment 
banking client of the firm, as set forth in the rule. Where an 
executive officer or director of a company (or a person materially 
supported by such executive officer or director) has a beneficial 
interest in an account, a member must also be able to identify the 
company on whose behalf such executive officer or director serves to 
determine whether the company is a current, recent or prospective 
investment banking client of the firm under the rule; if the member is 
unable to obtain such information, it has to resort to restricting all 
new issue allocations to such account, which is not the intended 
purpose of the rule.
    The spinning provision went into effect on September 26, 2011. and, 
since then, FINRA has received feedback from industry participants that 
obtaining the information necessary to ensure compliance with the rule, 
and eligibility for the de minimis exception, has proved difficult.\11\ 
In particular, FINRA understands that members (and their customers) 
have had difficulty obtaining, tracking and aggregating information 
from funds regarding indirect beneficial owners, such as participants 
in a fund of funds (``FOF''), for use in determining an account's 
eligibility for the de minimis exception and that this has resulted in 
compliance difficulties and restrictions, including in situations where 
the ability of an underwriter to confer any meaningful financial 
benefit to a particular investor by allocating new issue shares to the 
account is impracticable.\12\
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    \11\ Among other exceptions, Rule 5131(b)(2) provides a de 
minimis exception for new issue allocations to any account in which 
the beneficial interests of executive officers and directors of a 
company subject to the rule, and persons materially supported by 
such executive officers and directors, do not exceed in the 
aggregate 25% of such account.
    \12\ For example, members have noted that broker-dealers 
normally do not know the identity of the beneficial owners of the 
fund of funds invested in the account.
---------------------------------------------------------------------------

    Thus, in the Original Proposal, FINRA proposed a limited exception 
from the spinning provision, subject to a set of conditions, designed 
to ensure the important protections of Rule 5131(b) continue to be 
preserved, while offering meaningful relief for members and investors 
in situations where spinning abuse is not likely. Specifically, the 
Original Proposal provided that members may rely upon a written 
representation obtained within the prior 12 months from a person 
authorized to represent an account that does not look through to the 
beneficial owners of a fund invested in the account, provided that such 
fund:
     Is a ``private fund'' as defined in the Investment 
Advisers Act of 1940;
     is managed by an investment adviser;
     has assets greater than $50 million;
     owns less than 25% of the account and is not a fund in 
which a single investor has a beneficial interest of 25% or more;
     is ``unaffiliated'' with the account in that the private 
fund's investment adviser does not have a control person in common with 
the account's investment adviser; and
     was not formed for the specific purpose of investing in 
the account.
    The Original Proposal also required that, to be eligible for the 
exception, the unaffiliated private fund may not have a beneficial 
owner that also is a control person of such fund's investment adviser.
    The text of the proposed rule change is available on FINRA's Web 
site at https://www.finra.org, at the principal office of FINRA, and at 
the Commission's Public Reference Room.

III. Summary of Comments, FINRA's Response and Amendment No. 1

    As stated above, the Commission received two comment letters in 
response to the Original Proposal.\13\ Both commenters strongly support 
the adoption of the proposed amendment and stated that the proposed 
rule would ease the tracking burden for allocations to accounts that do 
not raise the concerns the spinning rule is designed to address, while 
also preserving the efficacy of the rule.\14\ However, the commenters 
also suggest certain modifications that they believe improve the 
usefulness of the proposed exception without compromising the 
objectives of the rule.\15\
---------------------------------------------------------------------------

    \13\ See supra note 4.
    \14\ See Cordium letter and MFA letter.
    \15\ Id.
---------------------------------------------------------------------------

    Both commenters asked that FINRA eliminate the proposed condition 
that the unaffiliated private fund must not have a beneficial owner 
that also is a control person of such fund's investment adviser.\16\ 
The commenters noted that it is not uncommon for an FOF to have an 
investor that is both a beneficial owner of the FOF and a control 
person of such fund's investment adviser.\17\ One commenter noted that 
investment in the fund by a control person serves the purpose of 
aligning the interests of a control person with the interests of the 
fund's investors and, therefore, is a practice that institutional 
investors often require from fund managers.\18\ The other commenter 
stated that this condition does not further the purposes of the 
spinning rule and recommended eliminating this aspect of the 
proposal.\19\
---------------------------------------------------------------------------

    \16\ Id.
    \17\ Id.
    \18\ See MFA letter.
    \19\ See Cordium letter.
---------------------------------------------------------------------------

    As an alternative, one commenter recommended that, rather than 
excluding funds with a beneficial owner that also is a control person 
of the investment adviser, the proposal instead should be amended to 
provide that a member may rely upon a written representation obtained 
within the prior 12 months from a person authorized to represent an 
account that does not look through to the beneficial owners of a fund 
invested in the account (other than a beneficial owner that is a 
control person of the investment adviser to such private fund), subject 
to the other

[[Page 72948]]

proposed conditions.\20\ FINRA agrees with this comment and, therefore, 
proposed a clarifying amendment to delete the proposed condition that 
the unaffiliated private fund must not have a beneficial owner that 
also is a control person of such fund's investment adviser and, 
instead, to include language substantially similar to that suggested by 
the commenter.\21\
---------------------------------------------------------------------------

    \20\ See MFA letter.
    \21\ See MFA letter.
---------------------------------------------------------------------------

    Therefore, where a beneficial owner also is a control person of the 
FOF's adviser, a member must ascertain whether such person is a covered 
person based upon the standards set forth in Rule 5131(b). If a member 
obtains a written representation from an account that a beneficial 
owner in an unaffiliated private fund is a control person of such 
fund's investment adviser, but is not a covered person under the 
spinning provision, an allocation to such account would still be 
eligible for the proposed exception, if the conditions, as amended, are 
met. If a beneficial owner in an unaffiliated private fund is both a 
control person and a covered person under the spinning provision, a new 
issue allocation to such covered persons would be impermissible, unless 
such allocation is permitted under another exception (e.g., the de 
minimis exception).\22\
---------------------------------------------------------------------------

    \22\ See supra note 11.
---------------------------------------------------------------------------

    As stated above, the commenters noted that it is not uncommon for 
an FOF to have an investor that is both a beneficial owner of the FOF 
and a control person of such fund's investment adviser. Therefore, the 
Original Proposal would not have provided the intended relief for 
members in many cases where the efficacy of the spinning provision 
would still be preserved. Thus, instead of eliminating eligibility for 
the exception for any FOF with a beneficial owner that also is a 
control person of such fund's investment adviser, the revised proposal 
would permit a member to avail itself of the exception with respect to 
other beneficial owners (that are not also control persons of the FOF's 
investment adviser). FINRA believes that this revision to the proposal 
strikes the proper balance between members' concerns regarding the 
difficulty of identifying indirect beneficial owners of an account and 
preserving the important protections of Rule 5131(b).
    One commenter also recommended that FINRA either reduce or 
eliminate the proposal's condition that, to be eligible under the 
exception, the unaffiliated private fund must have assets greater than 
$50 million.\23\ This commenter believes that the percentage ownership 
threshold conditions, which require that the unaffiliated private fund 
own less than 25% of the account and does not have a single investor 
with a beneficial interest of 25% or more, along with the other 
conditions, are sufficient to ensure that spinning would be 
unlikely.\24\
---------------------------------------------------------------------------

    \23\ See Cordium letter.
    \24\ See Cordium letter.
---------------------------------------------------------------------------

    FINRA is of the view that the percentage ownership threshold 
conditions alone are not sufficient to ensure that the protections of 
the spinning rule are preserved and, therefore, continues to believe 
that the ``assets greater than $50 million'' component is an 
appropriate additional safeguard. Specifically, FINRA believes that 
this requirement helps ensure a sufficient degree of dilution that 
would reduce the economic meaningfulness to a potentially covered 
person of any single IPO allocation, and therefore, does not propose 
eliminating or reducing this condition at this time.
    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 60 days following 
Commission approval. The effective date will be no later than 120 days 
following Commission approval.

IV. Commission Findings

    After carefully considering the proposed rule change, as modified 
by Amendment No. 1, the comments submitted, and FINRA's responses to 
the comments, the Commission finds that the proposed rule change, as 
modified by Amendment No. 1, is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to a national 
securities association.\25\ In particular, the Commission finds that 
the proposed rule change, as modified by Amendment No. 1, is consistent 
with Section 15A(b)(6) of the Act,\26\ which requires, among other 
things, that FINRA rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \25\ 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).
    \26\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    Specifically, the Commission believes that the proposed exception 
and required conditions, as amended, are consistent with the provisions 
of the Act noted above by promoting capital formation and aiding member 
compliance efforts, while maintaining investor confidence in the 
capital markets. In simplifying and clarifying the operation of the 
proposed exception for FINRA members and other industry participants, 
the Commission believes that the proposed rule change, as modified by 
Amendment No. 1, reasonably balances the compliance concerns and the 
burdens noted by the industry while preserving the efficacy of the 
spinning provision and FINRA's goal of assuring that the rule continues 
to be designed to promote capital formation and investor confidence and 
prevent fraudulent and manipulative behaviors.
    In addition, the Commission does not believe that the proposed rule 
change, as modified by Amendment No. 1, will result in any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act in that the proposed rule change provides an 
exception to Rule 5131(b) for accounts with unaffiliated private fund 
investors that face special difficulties under the existing exceptions 
from the rule, and thus reduces differential impacts of the rule 
without compromising the objectives of the spinning provision.
    The Commission believes that FINRA adequately addressed the 
comments raised in response to FINRA's notice.

 V. Accelerated Approval

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\27\ 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 respond to the comment letters received by the 
Commission in response to the Original Proposal and further simplify 
the operation of the spinning provision for members and other industry 
participants.\28\ In addition, accelerating approval of this proposed 
rule change, as modified by Amendment No. 1, should benefit FINRA 
members by aiding member compliance efforts while preserving the 
efficacy of the spinning provision and should benefit investors by 
maintaining investor protection in the capital markets.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78s(b)(2).
    \28\ See MFA letter. See also Cordium letter.
---------------------------------------------------------------------------

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No.

[[Page 72949]]

1, 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://sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2013-037 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-2013-037. This 
file number should be included on the subject line if email 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 
person 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-2013-037 and should be submitted 
on or before December 26, 2013.

VII. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-FINRA-2013-037), as modified 
by Amendment No. 1, be and hereby is approved on an accelerated basis.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
---------------------------------------------------------------------------

    \30\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-28975 Filed 12-3-13; 8:45 am]
BILLING CODE 8011-01-P
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