Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change To Adopt FINRA Rules 4314 (Securities Loans and Borrowings), 4330 (Customer Protection-Permissible Use of Customers' Securities) and 4340 (Callable Securities) in the Consolidated FINRA Rulebook, as Modified by Partial Amendments No. 1 and No. 2, 72951-72955 [2013-28976]
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Federal Register / Vol. 78, No. 233 / Wednesday, December 4, 2013 / Notices
transactions.7 Thus, a bona fide error
would be:
(i) The inaccurate conveyance or
execution of any term of an order
including, but not limited to, price,
number of shares or other unit of
trading; identification of the security;
identification of the account for which
securities are purchased or sold; lost or
otherwise misplaced order tickets; short
sales that were instead sold long or vice
versa; or the execution of an order on
the wrong side of a market; (ii) the
unauthorized or unintended purchase
sale or allocation of securities or the
failure to follow specific client
instructions; (iii) the incorrect entry of
data into relevant systems, including
reliance on incorrect cash positions,
withdrawals, or securities positions
reflected in an account; or (iv) a delay,
outage, or failure of a communication
system used to transmit market data
prices or to facilitate the delivery or
execution of an order.8
EMCDONALD on DSK67QTVN1PROD with NOTICES
Minimum Price Improvement Standards
The proposed rule change also would
establish the minimum amount of price
improvement necessary for a Member to
execute an order on a proprietary basis
when holding an unexecuted limit order
in that same security without being
required to execute the held limit order.
In addition, if the minimum price
improvement standards set forth in
proposed Interpretation and Policy .06,
paragraphs (a) through (g) would trigger
the protection of a pending customer
limit order, any better-priced customer
limit order(s) must also be protected
under the amended Rule, even if those
better-priced limit orders would not be
directly triggered under these minimum
price improvement standards.
Order Handling Procedures
The proposed rule change would
provide that a Member must make every
effort to execute a marketable customer
order that it receives fully and
promptly. A Member holding a
marketable customer order that has not
been immediately executed would have
to make every effort to cross such order
with any other order received by the
Member on the other side of the market,
up to the size of such order at a price
that is no less than the best bid and no
greater than the best offer at the time
that the subsequent order is received by
the Member and that is consistent with
the terms of the orders. If a Member
7 Securities Exchange Act Release No. 55884
(June 8, 2007), 72 FR 32926, 32927 (June 14, 2007)
(Order Exempting Certain Error Correction
Transactions from Rule 611 of Regulation NMS
under the Securities Exchange Act of 1934).
8 Id.
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were holding multiple orders on both
sides of the market that have not been
executed, the Member would have to
make every effort to cross or otherwise
execute such orders in a manner
reasonable and consistent with the
objectives of Rule 12.6, as amended, and
with the terms of the orders. A Member
could satisfy the crossing requirement
by contemporaneously buying from the
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.
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
9 In approving the BATS 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).
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72951
customer order protection rule
substantially similar to the customer
order protection rules of FINRA 11 and
other exchanges,12 the Commission
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–BATS–2013–
056) 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. 2013–28969 Filed 12–3–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70958; File No. SR–FINRA–
2013–035]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving
Proposed Rule Change To Adopt
FINRA Rules 4314 (Securities Loans
and Borrowings), 4330 (Customer
Protection—Permissible Use of
Customers’ Securities) and 4340
(Callable Securities) in the
Consolidated FINRA Rulebook, as
Modified by Partial Amendments No. 1
and No. 2
November 27, 2013.
On August 14, 2013, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
11 See
FINRA Rule 5320, supra note 5.
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
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).
12 Several
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Federal Register / Vol. 78, No. 233 / Wednesday, December 4, 2013 / Notices
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Exchange Act’’),1 a proposed
rule change to adopt financial and
operational rules relating to securities
loans and borrowings, permissible use
of customers’ securities, and callable
securities as FINRA Rules in the
consolidated FINRA rulebook. The
proposed rule was published for
comment in the Federal Register on
September 3, 2013.2 The Commission
received two comment letters on the
proposed rule change.3 On November
22, 2013, FINRA responded to the
comments and filed Partial Amendment
No. 1 to the proposed rule change.4 On
November 25, 2013 FINRA filed Partial
Amendment No. 2 to the proposed rule
change. The text of the proposed rule
change, as modified by Partial
Amendments No. 1 and No. 2, is
available on FINRA’s Web site at
https://www.finra.org, at the principal
office of FINRA, on the Commission’s
Web site at https://www.sec.gov, and at
the Commission’s Public Reference
Room.
This order approves the proposed rule
change, as modified by Partial
Amendments No. 1 and No. 2.
I. Description of the Proposal
As part of the process of developing
a new consolidated rulebook,5 FINRA
has proposed to amend and adopt the
following as FINRA Rules: (1) NYSE
Rule 296 (Liquidation of Securities
Loans and Borrowings) 6 and
Supplementary Material paragraphs .10
and .20 as FINRA Rule 4314 (Securities
1 15
U.S.C. 78s(b)(1).
Act Release No. 70272 (Aug. 27,
2013); 78 FR 54350 (Sep. 3, 2013).
3 Letter from Kyle Brandon, Managing Director,
SIFMA to Elizabeth Murphy, Secretary, Securities
and Exchange Commission, dated Sep. 24, 2013
(‘‘SIFMA Letter’’); Letter from William A. Jacobson,
Esq. and Hyesoo Jang, Cornell University Law
School to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission, dated Sep.
24, 2013 (‘‘Cornell Letter’’).
4 Letter from Kosha K. Dalal, FINRA to Elizabeth
M. Murphy, Secretary, Securities and Exchange
Commission, dated Nov. 22, 2013 (‘‘FINRA
Response Letter’’).
5 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. 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).
6 For convenience, the Incorporated NYSE Rules
are referred to as the NYSE Rules.
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2 Exchange
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Loans and Borrowings); (2) NYSE Rule
402 (Customer Protection—Reserves and
Custody of Securities) as FINRA Rule
4330 (Customer Protection—Permissible
Use of Customers’ Securities); and (3)
NYSE Rule 402.30 (Securities Callable
in Part) as FINRA Rule 4340 (Callable
Securities).
A. FINRA Rule 4314 (Securities Loans
and Borrowings)
FINRA is proposing new FINRA Rule
4314, which provides clarity as to
whether parties are acting as principals
or agents when entering into an
agreement to loan or borrow securities
by requiring a member that acts as agent
in a securities loan or borrow
transaction to disclose its capacity as
agent. In cases where the member lends
securities to or borrows securities from
a counterparty that is acting in an
agency capacity, proposed FINRA Rule
4314 would require that the member
maintain books and records to reflect
the details of the transaction with the
agent and each principal on whose
behalf the agent is acting and the details
of each transaction.
Specifically, proposed FINRA Rule
4314(a) would require a member that
lends or borrows securities in the
capacity of agent to disclose such
capacity to the other party or parties to
the transaction. The provision would
further require a member, prior to
lending securities to or borrowing
securities from a person that is not a
member of FINRA, to determine
whether the other party is acting as
principal or agent in the transaction.
When the other party (who may or may
not be a member) is acting as agent in
the transaction, the member would be
required to maintain books and records
that reflect: (A) The details of the
transaction with the agent; and (B) each
principal on whose behalf the agent is
acting and the details of each
transaction. In addition, proposed
FINRA Rule 4314(a) would establish a
uniform books and records requirement.
Proposed FINRA Rule 4314(b), based
on NYSE Rule 296(a), provides that each
member that is a party to an agreement
for the loan and borrowing of securities
with another member has the right to
liquidate such transaction whenever the
other party to such transaction becomes
subject to one of the liquidation
conditions specified in the rule. In
addition, proposed FINRA Rule 4314(c)
would require that no member shall
lend or borrow any security to or from
any person that is not a member of
FINRA, including any customer, except
pursuant to a written agreement. Under
the proposed rule, the written
agreement may consist of the exchange
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of contract confirmations that confers
upon such member the contractual right
to liquidate such transaction because of
a liquidation condition of the kind
specified in proposed FINRA Rule
4314(b).
FINRA is proposing to add new
Supplementary Material .01 through .05
to the proposed FINRA rule to provide
clarity and guidance by describing how
a member firm can meet its disclosure
obligations under the proposed rule,
and clarifying the proposed rule’s books
and records requirements. First, FINRA
is proposing to transfer NYSE Rule
296.10, which defines the term
‘‘agreement for the loan and borrowing
of securities,’’ as proposed
Supplementary Material .01, without
substantive change. Proposed
Supplementary Material .02 clarifies
that a member may satisfy its disclosure
obligation in proposed FINRA Rule
4314(a) by, among other things,
providing specific disclosure of its
capacity as agent in the written
agreement between the parties or in the
individual confirmations of each
security exchanged between the parties
for each loan and borrow transaction.
Proposed Supplementary Material .03
clarifies the books and records
requirements imposed by proposed
FINRA Rule 4314(a) by requiring
members to create and maintain records
for each securities loan or borrow
transaction in accordance with
Exchange Act Rules 17a–3 and 17a–4. It
also provides that when a member
enters into a securities loan or borrow
transaction with a party that is acting as
agent on behalf of another principal, the
member must maintain a record of the
details of the transaction with the agent
that includes certain specified
information.
Proposed Supplementary Material .04
reminds members of their obligations
under proposed FINRA Rule 4330(b)
(discussed below) to provide written
disclosures to customers regarding the
risks and financial impact associated
with the customer’s loan of securities,
and requires that members disclose in
such written notice their right to
liquidate the borrow transactions with
customers under the conditions
specified in proposed FINRA Rule
4314(b). Proposed Supplementary
Material .05 would require, for purposes
of proposed FINRA Rule 4314(c), that
each member subject to the provisions
of Exchange Act Rule 15c3–3 that
borrows fully paid or excess margin
securities from a customer must comply
with the provisions of Exchange Act
Rule 15c3–3 relating to the requirements
for a written agreement between the
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EMCDONALD on DSK67QTVN1PROD with NOTICES
borrowing member and the lending
customer.
B. FINRA Rule 4330 (Customer
Protection—Permissible Use of
Customers’ Securities)
FINRA is proposing new FINRA Rule
4330, which prohibits a member from
lending, either to itself or others,
securities that are held on margin for a
customer and that are eligible to be
pledged or loaned, unless the firm first
obtains a written authorization from the
customer permitting the lending of the
customer’s securities. The proposed rule
adds new disclosure requirements and
establishes the need for members to
conduct appropriateness determinations
before engaging in the borrowing and
lending of customers’ fully paid and
excess margin securities.
Specifically, proposed FINRA Rule
4330(a) would require a member to
obtain a customer’s written
authorization prior to lending securities
that are held on margin for the customer
and that are eligible to be pledged or
loaned. Proposed FINRA Rule 4330(a)
would provide that ‘‘[n]o member shall
lend securities that are held on margin
for a customer and that are eligible to be
pledged or loaned, unless such member
shall first have obtained a written
authorization from such customer
permitting the lending of such
securities.’’
FINRA has proposed two
supplementary provisions related to
proposed FINRA Rule 4330(a). Proposed
Supplementary Material .01 would
provide, consistent with NYSE Rule
402(a) and NASD Rule 2330(b), that the
definitions contained in Exchange Act
Rule 15c3–3 would apply to proposed
FINRA Rule 4330. However, the
proposed supplementary material does
not include the requirement contained
in both the NYSE and NASD rules for
members to maintain cash reserves as
prescribed by Exchange Act Rule 15c3–
3 because members continue to be
subject to Exchange Act Rule 15c3–3.
Proposed Supplementary Material .02,
which was modified by Partial
Amendment No. 1, deletes the specific
legend requirement contained in NYSE
Rule Interpretation 402(b)/01 that was
required to be placed in customer
margin agreements. Instead, proposed
Supplementary Material .02 requires
that the customer account agreement/
margin agreement/loan consent include
a clear and prominent disclosure that
the broker-dealer may lend, either to
itself or others, any securities held in a
customer’s margin account.
In addition, FINRA proposed new
requirements in proposed FINRA Rule
4330(b) to address the borrowing and
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lending of customers’ fully paid or
excess margin securities. Specifically,
proposed FINRA Rule 4330(b)(1) would
require a member that borrows fully
paid or excess margin securities carried
for the account of any customer to: (A)
Comply with the requirements of
Exchange Act Rule 15c3–3; (B) comply
with the requirements of Section 15(e)
of the Exchange Act to provide notices
to customers regarding securities
lending; and (C) notify FINRA, in such
manner and format as FINRA may
require, at least 30 days prior to first
engaging in such securities borrows.
Proposed Supplementary Material .03
would provide that upon FINRA’s
receipt of such written notification
required under proposed FINRA Rule
43330(b)(1)(C), FINRA may request such
additional information as it may deem
necessary to evaluate compliance with
Exchange Act Rule 15c3–3, Section
15(e) of the Exchange Act and other
applicable FINRA rules or federal
securities laws or rules. Proposed
Supplementary Material .03 gives
examples of the additional information
that FINRA may request, such as the
member’s operational and
recordkeeping processes related to the
securities borrows.
Proposed FINRA Rule 4330(b)(2)
would impose two new requirements
that a member must satisfy prior to first
entering into a securities borrow
transaction with a customer. First,
proposed FINRA Rule 4330(b)(2)(A)
would require that a member have
reasonable grounds for believing that
the customer’s loan of securities is
appropriate for the customer. In making
this determination, the member would
be required to exercise reasonable
diligence to ascertain the essential facts
relative to the customer, including, but
not limited to, the customer’s financial
situation and needs, tax status,
investment objectives, investment time
horizon, liquidity needs, risk tolerance
and any other information the customer
may disclose to the member or
associated person in connection with
entering such securities loan
transaction. Accordingly, where a
member has a securities borrow
program, the member would be required
to determine the appropriateness of
such activity for the customer prior to
the customer entering into the first
securities borrow. Proposed
Supplementary Material .04 clarifies
that the member borrowing a customer’s
fully paid or excess margin securities is
responsible for making the
determination under proposed FINRA
Rule 4330(b)(2)(A), regarding the
appropriateness of such borrow from a
customer. The proposed supplementary
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72953
material would provide that when the
member has entered into a carrying
agreement with an introducing member
pursuant to FINRA Rule 4311, the
member may rely on the representations
of the introducing member that has a
customer relationship with the lender in
making the determination.
In Partial Amendment No. 1, FINRA
proposed adding proposed
Supplementary Material .05 that would
allow a member to determine that a
customer’s loan of securities is
appropriate for the customer by
complying with FINRA Rule 2111(b) if
the customer is an institutional
account.7 FINRA stated in its response
to comments that members with
documentation that they have used to
evaluate institutional accounts under
FINRA Rule 2111(b) should review that
documentation to ensure that it
complies with the requirements of
proposed FINRA Rule 4330.8
Second, proposed FINRA Rule
4330(b)(2)(B) would require a member,
prior to first entering into securities
borrows with a customer, to provide the
customer, in writing (which may be
electronic), with a clear and prominent
notice stating that the provisions of the
Securities Investor Protection Act of
1970 may not protect the customer with
respect to the customer’s securities loan
transaction and that the collateral
delivered to the customer may
constitute the only source of satisfaction
of the member’s obligation in the event
the member fails to return the securities.
In addition, proposed FINRA Rule
4330(b)(2)(B) would require a member
to provide the customer with certain
disclosures regarding the customer’s
rights with respect to the loaned
securities, and the risks and financial
impact associated with the customer’s
loan of securities. Proposed FINRA Rule
4330(b)(3) would require that a member
create and maintain books and records
evidencing compliance with proposed
FINRA Rule 4330(b)(2). Such records
must be maintained in accordance with
the requirements of Exchange Act Rule
17a–4(a).
Proposed Supplementary Material .06
would require members that have any
existing fully paid or excess margin
securities borrows with customers as of
the effective date of proposed Rule 4330
to notify FINRA in writing of such
borrows within 30 days from the
effective date of the rule. FINRA will
specify the manner and format of such
7 FINRA Rule 2111 is FINRA’s suitability rule.
Rule 2111(b) provides an exemption to customerspecific suitability regarding institutional investors
if the conditions listed in that paragraph are
satisfied.
8 FINRA Response Letter, at 5
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EMCDONALD on DSK67QTVN1PROD with NOTICES
notification in a Regulatory Notice
announcing the effectiveness of the rule.
In addition, in Partial Amendment No.
2 FINRA proposed extending the
amount of time that members would
have to provide customers with the
disclosures required by proposed
FINRA Rule 4330(b)(2)(B) from 90 days
to 180 days from the effective date of the
rule.
C. FINRA Rule 4340 (Callable
Securities)
FINRA is proposing new FINRA Rule
4340 to provide clarity to customers
about the procedure used by a member
when a security is called or redeemed
prior to maturity. Proposed FINRA Rule
4340(a) requires each member that has
in its possession or under its control any
security that by its terms may be called
or redeemed prior to maturity to
identify such securities and establish an
impartial lottery system by which it will
allocate among its customers the
securities to be redeemed or selected as
called in the event of a partial
redemption or call. The proposed rule
change is based on NYSE Rule 402.30,
but would eliminate the specific
requirements in NYSE Rule 402.30
regarding the establishment of an
impartial lottery system in which the
probability of a customer’s securities
being selected as called is proportional
to the holdings of all customers of such
securities held in bulk by the member.
Instead, proposed FINRA Rule
4340(a)(1) would adopt a more flexible
approach that would allow a member to
establish, and make available on the
member’s Web site, procedures by
which it will allocate among its
customers, on a fair and impartial basis,
the securities to be redeemed or selected
as called in the event of a partial
redemption or call. Proposed
Supplementary Material .02 would
clarify that such procedures may
include the use of an impartial lottery
system, acting on a pro-rata basis, or
such other means as will achieve a fair
and impartial allocation of the partially
redeemed or called securities.
Proposed FINRA Rule 4340(a)(2)
would require the member to provide
written notice, which may be electronic,
to new customers at the opening of an
account, and to all customers at least
once every calendar year, of the manner
in which they may access the allocation
procedures on the member’s Web site
and that, upon a customer’s request, the
member will provide hard copies of the
allocation procedures to the customer.
Proposed FINRA Rule 4340(b) would
prohibit a member from allocating
securities to any of its accounts or those
of its ‘‘associated persons’’ in a
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redemption offered on terms favorable
to the called parties until all other
customers’ positions have been
satisfied. Proposed FINRA Rule 4340(b)
would apply the restriction to a member
and its ‘‘associated persons,’’ rather than
to a member’s ‘‘employees, partners,
officers, directors, and approved
persons,’’ which was the language in
NYSE Rule 402.30. Accordingly, the
proposed rule would provide that,
where redemption of callable securities
is made on terms favorable to the called
parties, a member shall not allocate the
securities to any account in which it or
its associated persons have an interest
until all other customers’ positions in
such securities have been satisfied.
Proposed Supplementary Material .01
would clarify that the term ‘‘associated
person’’ as used in the proposed rule
would have the meaning provided in
Section 3(a)(18) of the Exchange Act,
which expressly excludes, for certain
purposes, any persons associated with
the member whose functions are solely
clerical or ministerial (referred to as
‘‘clerical and ministerial associated
persons’’). The proposed supplementary
material also would make clear that, in
the event of a redemption made on
terms favorable to the called parties, a
member may include the accounts of
clerical and ministerial associated
persons in the pool of securities eligible
to be called.
Where the redemption of callable
securities is made on terms unfavorable
to the called parties, proposed FINRA
Rule 4340(c) and proposed
Supplementary Material .03 would
make clear that a member cannot
exclude its positions or those of its
associated persons, including the
accounts of clerical and ministerial
associated persons, from the pool of
securities eligible to be called. FINRA
believes that requiring a firm to include
the positions of the firm and all its
associated persons (including those
engaged in clerical and ministerial
functions) when a redemption is on
terms unfavorable to the called parties
is reasonable because the provision
ensures that all parties are on parity. In
addition, proposed Supplementary
Material .03 would codify that where an
introducing member is a party to a
carrying agreement with another
member that is conducting an allocation
pursuant to proposed FINRA Rule
4340(a), any accounts in which the
introducing member or its associated
persons have an interest shall be subject
to the provisions regarding participation
in favorable and unfavorable calls or
redemptions. Furthermore, the
introducing member must identify such
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accounts to the member conducting the
allocation.
III. Summary of Comments and
FINRA’s Response
As noted above, the Commission
received two comment letters in
response to the proposed amendments.
Both comments expressed support for
the proposed rule change. The comment
letters, and FINRA’s response to
comments, are summarized below.
A. Proposed FINRA Rule 4314
The Commission received one
comment in response to proposed
FINRA Rule 4314. The commenter
requested that proposed FINRA Rule
4314 cross-reference the Agency
Lending Disclosure Initiative (‘‘ALD
Initiative’’).9 The commenter also
requested that the Commission staff
finalize a draft no-action request with
respect to agency lending (‘‘ALD NoAction Letter’’).10 In its response letter
to the Commission, FINRA
acknowledged the ALD Initiative and
the ALD No-Action Letter. FINRA
stated, however, that notwithstanding
the ALD Initiative and ALD No-Action
Letter it ‘‘believes that proposed Rule
4314 addresses the need for
transparency and disclosure under
securities lending arrangements’’ and
should be adopted.11 FINRA further
stated that once the ALD No-Action
Letter is finalized, it will review the
requirements of FINRA Rule 4314 to
address any inconsistencies between the
rule and the no-action letter.12
B. Proposed FINRA Rule 4330
The Commission received two
comments in response to proposed
FINRA Rule 4330. One commenter
supported the written authorization
requirement in proposed FINRA Rule
4330(a) ‘‘because it will alert customers
about use of their margin securities and
pertinent risks.’’ 13 One commenter
stated that language used as a safe
harbor in proposed Supplementary
Material .02 should apply only to
customer margin agreements entered
into after the effective date of proposed
FINRA Rule 4330.14 The commenter
further asked that FINRA clarify the
exact language that would comply with
the rule as well as where the language
9 SIFMA Letter, at 4. In 2006, the industry began
to adopt voluntary books and records and
disclosure practices relating to securities lending as
a result of an industry-wide initiative to address the
risks associated with agency lending, which became
known as the ALD Initiative.
10 Id.
11 FINRA Response Letter, at 2.
12 Id.
13 Cornell Letter, at 2.
14 SIFMA Letter, at 5.
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EMCDONALD on DSK67QTVN1PROD with NOTICES
Federal Register / Vol. 78, No. 233 / Wednesday, December 4, 2013 / Notices
should be placed relative to the
signature line.15 In response to these
comments, FINRA amended the
language in proposed Supplementary
Material .02 to delete the specific
language that had been included as a
safe harbor. Although the language in
proposed Supplementary Material .02
was identical to the language in NYSE
Rule Interpretation 402(b)/01, some
FINRA members had not previously
been subject to the requirements of
NYSE Rule Interpretation 402(b)/01.
FINRA recognized that for those
members that had not previously been
subject to proposed Supplementary
Material .02 the costs to ‘‘re-paper’’
customer margin agreements could be
burdensome. Thus, FINRA removed the
safe harbor language in proposed
Supplementary Material .02 and added
language stating that the customer
account agreement/margin agreement/
loan consent must include ‘‘clear and
prominent disclosure that the firm may
lend either to itself or others any
securities held by the customer in its
margin account.’’ 16
Proposed FINRA Rule 4330(b)(2)(A)
would require a member to have
reasonable grounds to believe that the
customer’s loan of securities is
appropriate. One commenter supported
the proposed amendments stating that it
will provide additional protection to
customers.17 Another commenter
supported the provision but suggested
that FINRA adopt an institutional safe
harbor similar to FINRA Rule 2111(b).18
In response to these comments, FINRA
added new proposed Supplementary
Material .05, which states that ‘‘a
member may fulfill the obligation set
forth in paragraph (b)(2)(A) above for an
institutional account . . . by complying
with the requirements of Rule 2111(b).’’
FINRA further stated that firms with
existing institutional customers under
FINRA Rule 2111(b) should evaluate
those customers to ensure they comply
with the requirements of proposed
FINRA Rule 4330. Thus, any
institutional customer, regardless of
whether the customer meets the
requirements of FINRA Rule 2111(b),
would need to also satisfy the
requirements in FINRA Rule 4330.
Proposed FINRA Rule 4330(b)(2)(B)
requires members to provide customers
with certain disclosures relating to a
customer’s securities loan transactions.
One commenter supported this
disclosure requirement believing it will
help customers ‘‘assess the risks and
15 Id.,
at 4–5.
16 FINRA Response Letter, at 4.
17 Cornell Letter, at 2.
18 SIFMA Letter, at 5.
VerDate Mar<15>2010
17:09 Dec 03, 2013
Jkt 232001
financial impact associated with
securities lending transactions.’’ 19 One
commenter suggested developing an
industry standard risk disclosure
form.20 FINRA stated that it recognizes
the benefits of a standard disclosure
form and understood that creating such
a form may take longer than FINRA’s
proposed effective date for the rule.21
Thus, FINRA agreed to extend the
compliance date for providing
disclosures to customers to 180 days
following the effective date of the
proposed rule change. FINRA notes that
while it will work with industry groups
to develop such a template, a standard
template would not guarantee
compliance with FINRA rules. Further,
FINRA stated that members should
tailor their disclosures to fit their
particular situation.
C. Proposed FINRA Rule 4340
The Commission received no
comments on proposed FINRA Rule
4340.
IV. Discussion and Commission’s
Findings
After careful review of the proposed
rule change, the comments received,
and FINRA’s Response Letter, the
Commission finds that the proposed
rule change, as modified by Partial
Amendments No. 1 and No. 2, is
consistent with the requirements of the
Exchange Act and the rules and
regulations thereunder applicable to a
national securities association.22 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 15A(b)(6) of the Exchange
Act, 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, to foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities, 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.23
More specifically, the Commission
believes the proposed new rules provide
important protections for customers
who engage in securities lending
transactions. The proposed new rules
will provide consistency throughout the
19 Cornell
Letter, at 2.
Letter, at 6.
21 FINRA Response Letter, at 5–6.
22 In approving this rule change, the Commission
notes that it has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
23 15 U.S.C. 78o–3(b)(6).
20 SIFMA
PO 00000
Frm 00097
Fmt 4703
Sfmt 4703
72955
industry with respect to securities
lending transactions. The proposed new
rules protect customers by promoting
transparency, establishing uniform
books and records requirements,
providing customers with additional
disclosures, and providing redemptions
that are free from conflicts of interests.
The Commission believes that FINRA
has adequately responded to the
concerns raised by commenters by
adding further explanation in the
Supplementary Material for proposed
FINRA Rule 4330 and by extending the
compliance date for FINRA Rule
4330(b)(2)(B). These changes were made
in Partial Amendments No. 1 and No. 2,
which the Commission believes adds
clarity to the new rules.
For the reasons stated above, the
Commission finds that the rule change
is consistent with the Exchange Act and
the rules and regulations thereunder.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,24
that the proposed rule change (SR–
FINRA–2013–035), as modified by
Partial Amendments No. 1 and No. 2,
be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–28976 Filed 12–3–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70954; File No. SR–
NYSEArca–2013–127]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change, as Modified by
Amendment No. 1 Thereto, To List and
Trade Under NYSE Arca Equities Rule
8.600 Shares of Nine Series of the
IndexIQ Active ETF Trust
November 27, 2013
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on
November 18, 2013, NYSE Arca, Inc.
(the ‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
24 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
25 17
E:\FR\FM\04DEN1.SGM
04DEN1
]]>Agencies
[Federal Register Volume 78, Number 233 (Wednesday, December 4, 2013)]
[Notices]
[Pages 72951-72955]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28976]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70958; File No. SR-FINRA-2013-035]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change To Adopt FINRA
Rules 4314 (Securities Loans and Borrowings), 4330 (Customer
Protection--Permissible Use of Customers' Securities) and 4340
(Callable Securities) in the Consolidated FINRA Rulebook, as Modified
by Partial Amendments No. 1 and No. 2
November 27, 2013.
On August 14, 2013, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and
[[Page 72952]]
Exchange Commission (``SEC'' or ``Commission''), pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act''),\1\
a proposed rule change to adopt financial and operational rules
relating to securities loans and borrowings, permissible use of
customers' securities, and callable securities as FINRA Rules in the
consolidated FINRA rulebook. The proposed rule was published for
comment in the Federal Register on September 3, 2013.\2\ The Commission
received two comment letters on the proposed rule change.\3\ On
November 22, 2013, FINRA responded to the comments and filed Partial
Amendment No. 1 to the proposed rule change.\4\ On November 25, 2013
FINRA filed Partial Amendment No. 2 to the proposed rule change. The
text of the proposed rule change, as modified by Partial Amendments No.
1 and No. 2, is available on FINRA's Web site at https://www.finra.org,
at the principal office of FINRA, on the Commission's Web site at
https://www.sec.gov, and at the Commission's Public Reference Room.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ Exchange Act Release No. 70272 (Aug. 27, 2013); 78 FR 54350
(Sep. 3, 2013).
\3\ Letter from Kyle Brandon, Managing Director, SIFMA to
Elizabeth Murphy, Secretary, Securities and Exchange Commission,
dated Sep. 24, 2013 (``SIFMA Letter''); Letter from William A.
Jacobson, Esq. and Hyesoo Jang, Cornell University Law School to
Elizabeth M. Murphy, Secretary, Securities and Exchange Commission,
dated Sep. 24, 2013 (``Cornell Letter'').
\4\ Letter from Kosha K. Dalal, FINRA to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, dated Nov. 22, 2013
(``FINRA Response Letter'').
---------------------------------------------------------------------------
This order approves the proposed rule change, as modified by
Partial Amendments No. 1 and No. 2.
I. Description of the Proposal
As part of the process of developing a new consolidated
rulebook,\5\ FINRA has proposed to amend and adopt the following as
FINRA Rules: (1) NYSE Rule 296 (Liquidation of Securities Loans and
Borrowings) \6\ and Supplementary Material paragraphs .10 and .20 as
FINRA Rule 4314 (Securities Loans and Borrowings); (2) NYSE Rule 402
(Customer Protection--Reserves and Custody of Securities) as FINRA Rule
4330 (Customer Protection--Permissible Use of Customers' Securities);
and (3) NYSE Rule 402.30 (Securities Callable in Part) as FINRA Rule
4340 (Callable Securities).
---------------------------------------------------------------------------
\5\ 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. 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).
\6\ For convenience, the Incorporated NYSE Rules are referred to
as the NYSE Rules.
---------------------------------------------------------------------------
A. FINRA Rule 4314 (Securities Loans and Borrowings)
FINRA is proposing new FINRA Rule 4314, which provides clarity as
to whether parties are acting as principals or agents when entering
into an agreement to loan or borrow securities by requiring a member
that acts as agent in a securities loan or borrow transaction to
disclose its capacity as agent. In cases where the member lends
securities to or borrows securities from a counterparty that is acting
in an agency capacity, proposed FINRA Rule 4314 would require that the
member maintain books and records to reflect the details of the
transaction with the agent and each principal on whose behalf the agent
is acting and the details of each transaction.
Specifically, proposed FINRA Rule 4314(a) would require a member
that lends or borrows securities in the capacity of agent to disclose
such capacity to the other party or parties to the transaction. The
provision would further require a member, prior to lending securities
to or borrowing securities from a person that is not a member of FINRA,
to determine whether the other party is acting as principal or agent in
the transaction. When the other party (who may or may not be a member)
is acting as agent in the transaction, the member would be required to
maintain books and records that reflect: (A) The details of the
transaction with the agent; and (B) each principal on whose behalf the
agent is acting and the details of each transaction. In addition,
proposed FINRA Rule 4314(a) would establish a uniform books and records
requirement.
Proposed FINRA Rule 4314(b), based on NYSE Rule 296(a), provides
that each member that is a party to an agreement for the loan and
borrowing of securities with another member has the right to liquidate
such transaction whenever the other party to such transaction becomes
subject to one of the liquidation conditions specified in the rule. In
addition, proposed FINRA Rule 4314(c) would require that no member
shall lend or borrow any security to or from any person that is not a
member of FINRA, including any customer, except pursuant to a written
agreement. Under the proposed rule, the written agreement may consist
of the exchange of contract confirmations that confers upon such member
the contractual right to liquidate such transaction because of a
liquidation condition of the kind specified in proposed FINRA Rule
4314(b).
FINRA is proposing to add new Supplementary Material .01 through
.05 to the proposed FINRA rule to provide clarity and guidance by
describing how a member firm can meet its disclosure obligations under
the proposed rule, and clarifying the proposed rule's books and records
requirements. First, FINRA is proposing to transfer NYSE Rule 296.10,
which defines the term ``agreement for the loan and borrowing of
securities,'' as proposed Supplementary Material .01, without
substantive change. Proposed Supplementary Material .02 clarifies that
a member may satisfy its disclosure obligation in proposed FINRA Rule
4314(a) by, among other things, providing specific disclosure of its
capacity as agent in the written agreement between the parties or in
the individual confirmations of each security exchanged between the
parties for each loan and borrow transaction. Proposed Supplementary
Material .03 clarifies the books and records requirements imposed by
proposed FINRA Rule 4314(a) by requiring members to create and maintain
records for each securities loan or borrow transaction in accordance
with Exchange Act Rules 17a-3 and 17a-4. It also provides that when a
member enters into a securities loan or borrow transaction with a party
that is acting as agent on behalf of another principal, the member must
maintain a record of the details of the transaction with the agent that
includes certain specified information.
Proposed Supplementary Material .04 reminds members of their
obligations under proposed FINRA Rule 4330(b) (discussed below) to
provide written disclosures to customers regarding the risks and
financial impact associated with the customer's loan of securities, and
requires that members disclose in such written notice their right to
liquidate the borrow transactions with customers under the conditions
specified in proposed FINRA Rule 4314(b). Proposed Supplementary
Material .05 would require, for purposes of proposed FINRA Rule
4314(c), that each member subject to the provisions of Exchange Act
Rule 15c3-3 that borrows fully paid or excess margin securities from a
customer must comply with the provisions of Exchange Act Rule 15c3-3
relating to the requirements for a written agreement between the
[[Page 72953]]
borrowing member and the lending customer.
B. FINRA Rule 4330 (Customer Protection--Permissible Use of Customers'
Securities)
FINRA is proposing new FINRA Rule 4330, which prohibits a member
from lending, either to itself or others, securities that are held on
margin for a customer and that are eligible to be pledged or loaned,
unless the firm first obtains a written authorization from the customer
permitting the lending of the customer's securities. The proposed rule
adds new disclosure requirements and establishes the need for members
to conduct appropriateness determinations before engaging in the
borrowing and lending of customers' fully paid and excess margin
securities.
Specifically, proposed FINRA Rule 4330(a) would require a member to
obtain a customer's written authorization prior to lending securities
that are held on margin for the customer and that are eligible to be
pledged or loaned. Proposed FINRA Rule 4330(a) would provide that
``[n]o member shall lend securities that are held on margin for a
customer and that are eligible to be pledged or loaned, unless such
member shall first have obtained a written authorization from such
customer permitting the lending of such securities.''
FINRA has proposed two supplementary provisions related to proposed
FINRA Rule 4330(a). Proposed Supplementary Material .01 would provide,
consistent with NYSE Rule 402(a) and NASD Rule 2330(b), that the
definitions contained in Exchange Act Rule 15c3-3 would apply to
proposed FINRA Rule 4330. However, the proposed supplementary material
does not include the requirement contained in both the NYSE and NASD
rules for members to maintain cash reserves as prescribed by Exchange
Act Rule 15c3-3 because members continue to be subject to Exchange Act
Rule 15c3-3.
Proposed Supplementary Material .02, which was modified by Partial
Amendment No. 1, deletes the specific legend requirement contained in
NYSE Rule Interpretation 402(b)/01 that was required to be placed in
customer margin agreements. Instead, proposed Supplementary Material
.02 requires that the customer account agreement/margin agreement/loan
consent include a clear and prominent disclosure that the broker-dealer
may lend, either to itself or others, any securities held in a
customer's margin account.
In addition, FINRA proposed new requirements in proposed FINRA Rule
4330(b) to address the borrowing and lending of customers' fully paid
or excess margin securities. Specifically, proposed FINRA Rule
4330(b)(1) would require a member that borrows fully paid or excess
margin securities carried for the account of any customer to: (A)
Comply with the requirements of Exchange Act Rule 15c3-3; (B) comply
with the requirements of Section 15(e) of the Exchange Act to provide
notices to customers regarding securities lending; and (C) notify
FINRA, in such manner and format as FINRA may require, at least 30 days
prior to first engaging in such securities borrows.
Proposed Supplementary Material .03 would provide that upon FINRA's
receipt of such written notification required under proposed FINRA Rule
43330(b)(1)(C), FINRA may request such additional information as it may
deem necessary to evaluate compliance with Exchange Act Rule 15c3-3,
Section 15(e) of the Exchange Act and other applicable FINRA rules or
federal securities laws or rules. Proposed Supplementary Material .03
gives examples of the additional information that FINRA may request,
such as the member's operational and recordkeeping processes related to
the securities borrows.
Proposed FINRA Rule 4330(b)(2) would impose two new requirements
that a member must satisfy prior to first entering into a securities
borrow transaction with a customer. First, proposed FINRA Rule
4330(b)(2)(A) would require that a member have reasonable grounds for
believing that the customer's loan of securities is appropriate for the
customer. In making this determination, the member would be required to
exercise reasonable diligence to ascertain the essential facts relative
to the customer, including, but not limited to, the customer's
financial situation and needs, tax status, investment objectives,
investment time horizon, liquidity needs, risk tolerance and any other
information the customer may disclose to the member or associated
person in connection with entering such securities loan transaction.
Accordingly, where a member has a securities borrow program, the member
would be required to determine the appropriateness of such activity for
the customer prior to the customer entering into the first securities
borrow. Proposed Supplementary Material .04 clarifies that the member
borrowing a customer's fully paid or excess margin securities is
responsible for making the determination under proposed FINRA Rule
4330(b)(2)(A), regarding the appropriateness of such borrow from a
customer. The proposed supplementary material would provide that when
the member has entered into a carrying agreement with an introducing
member pursuant to FINRA Rule 4311, the member may rely on the
representations of the introducing member that has a customer
relationship with the lender in making the determination.
In Partial Amendment No. 1, FINRA proposed adding proposed
Supplementary Material .05 that would allow a member to determine that
a customer's loan of securities is appropriate for the customer by
complying with FINRA Rule 2111(b) if the customer is an institutional
account.\7\ FINRA stated in its response to comments that members with
documentation that they have used to evaluate institutional accounts
under FINRA Rule 2111(b) should review that documentation to ensure
that it complies with the requirements of proposed FINRA Rule 4330.\8\
---------------------------------------------------------------------------
\7\ FINRA Rule 2111 is FINRA's suitability rule. Rule 2111(b)
provides an exemption to customer-specific suitability regarding
institutional investors if the conditions listed in that paragraph
are satisfied.
\8\ FINRA Response Letter, at 5
---------------------------------------------------------------------------
Second, proposed FINRA Rule 4330(b)(2)(B) would require a member,
prior to first entering into securities borrows with a customer, to
provide the customer, in writing (which may be electronic), with a
clear and prominent notice stating that the provisions of the
Securities Investor Protection Act of 1970 may not protect the customer
with respect to the customer's securities loan transaction and that the
collateral delivered to the customer may constitute the only source of
satisfaction of the member's obligation in the event the member fails
to return the securities. In addition, proposed FINRA Rule
4330(b)(2)(B) would require a member to provide the customer with
certain disclosures regarding the customer's rights with respect to the
loaned securities, and the risks and financial impact associated with
the customer's loan of securities. Proposed FINRA Rule 4330(b)(3) would
require that a member create and maintain books and records evidencing
compliance with proposed FINRA Rule 4330(b)(2). Such records must be
maintained in accordance with the requirements of Exchange Act Rule
17a-4(a).
Proposed Supplementary Material .06 would require members that have
any existing fully paid or excess margin securities borrows with
customers as of the effective date of proposed Rule 4330 to notify
FINRA in writing of such borrows within 30 days from the effective date
of the rule. FINRA will specify the manner and format of such
[[Page 72954]]
notification in a Regulatory Notice announcing the effectiveness of the
rule. In addition, in Partial Amendment No. 2 FINRA proposed extending
the amount of time that members would have to provide customers with
the disclosures required by proposed FINRA Rule 4330(b)(2)(B) from 90
days to 180 days from the effective date of the rule.
C. FINRA Rule 4340 (Callable Securities)
FINRA is proposing new FINRA Rule 4340 to provide clarity to
customers about the procedure used by a member when a security is
called or redeemed prior to maturity. Proposed FINRA Rule 4340(a)
requires each member that has in its possession or under its control
any security that by its terms may be called or redeemed prior to
maturity to identify such securities and establish an impartial lottery
system by which it will allocate among its customers the securities to
be redeemed or selected as called in the event of a partial redemption
or call. The proposed rule change is based on NYSE Rule 402.30, but
would eliminate the specific requirements in NYSE Rule 402.30 regarding
the establishment of an impartial lottery system in which the
probability of a customer's securities being selected as called is
proportional to the holdings of all customers of such securities held
in bulk by the member. Instead, proposed FINRA Rule 4340(a)(1) would
adopt a more flexible approach that would allow a member to establish,
and make available on the member's Web site, procedures by which it
will allocate among its customers, on a fair and impartial basis, the
securities to be redeemed or selected as called in the event of a
partial redemption or call. Proposed Supplementary Material .02 would
clarify that such procedures may include the use of an impartial
lottery system, acting on a pro-rata basis, or such other means as will
achieve a fair and impartial allocation of the partially redeemed or
called securities.
Proposed FINRA Rule 4340(a)(2) would require the member to provide
written notice, which may be electronic, to new customers at the
opening of an account, and to all customers at least once every
calendar year, of the manner in which they may access the allocation
procedures on the member's Web site and that, upon a customer's
request, the member will provide hard copies of the allocation
procedures to the customer.
Proposed FINRA Rule 4340(b) would prohibit a member from allocating
securities to any of its accounts or those of its ``associated
persons'' in a redemption offered on terms favorable to the called
parties until all other customers' positions have been satisfied.
Proposed FINRA Rule 4340(b) would apply the restriction to a member and
its ``associated persons,'' rather than to a member's ``employees,
partners, officers, directors, and approved persons,'' which was the
language in NYSE Rule 402.30. Accordingly, the proposed rule would
provide that, where redemption of callable securities is made on terms
favorable to the called parties, a member shall not allocate the
securities to any account in which it or its associated persons have an
interest until all other customers' positions in such securities have
been satisfied.
Proposed Supplementary Material .01 would clarify that the term
``associated person'' as used in the proposed rule would have the
meaning provided in Section 3(a)(18) of the Exchange Act, which
expressly excludes, for certain purposes, any persons associated with
the member whose functions are solely clerical or ministerial (referred
to as ``clerical and ministerial associated persons''). The proposed
supplementary material also would make clear that, in the event of a
redemption made on terms favorable to the called parties, a member may
include the accounts of clerical and ministerial associated persons in
the pool of securities eligible to be called.
Where the redemption of callable securities is made on terms
unfavorable to the called parties, proposed FINRA Rule 4340(c) and
proposed Supplementary Material .03 would make clear that a member
cannot exclude its positions or those of its associated persons,
including the accounts of clerical and ministerial associated persons,
from the pool of securities eligible to be called. FINRA believes that
requiring a firm to include the positions of the firm and all its
associated persons (including those engaged in clerical and ministerial
functions) when a redemption is on terms unfavorable to the called
parties is reasonable because the provision ensures that all parties
are on parity. In addition, proposed Supplementary Material .03 would
codify that where an introducing member is a party to a carrying
agreement with another member that is conducting an allocation pursuant
to proposed FINRA Rule 4340(a), any accounts in which the introducing
member or its associated persons have an interest shall be subject to
the provisions regarding participation in favorable and unfavorable
calls or redemptions. Furthermore, the introducing member must identify
such accounts to the member conducting the allocation.
III. Summary of Comments and FINRA's Response
As noted above, the Commission received two comment letters in
response to the proposed amendments. Both comments expressed support
for the proposed rule change. The comment letters, and FINRA's response
to comments, are summarized below.
A. Proposed FINRA Rule 4314
The Commission received one comment in response to proposed FINRA
Rule 4314. The commenter requested that proposed FINRA Rule 4314 cross-
reference the Agency Lending Disclosure Initiative (``ALD
Initiative'').\9\ The commenter also requested that the Commission
staff finalize a draft no-action request with respect to agency lending
(``ALD No-Action Letter'').\10\ In its response letter to the
Commission, FINRA acknowledged the ALD Initiative and the ALD No-Action
Letter. FINRA stated, however, that notwithstanding the ALD Initiative
and ALD No-Action Letter it ``believes that proposed Rule 4314
addresses the need for transparency and disclosure under securities
lending arrangements'' and should be adopted.\11\ FINRA further stated
that once the ALD No-Action Letter is finalized, it will review the
requirements of FINRA Rule 4314 to address any inconsistencies between
the rule and the no-action letter.\12\
---------------------------------------------------------------------------
\9\ SIFMA Letter, at 4. In 2006, the industry began to adopt
voluntary books and records and disclosure practices relating to
securities lending as a result of an industry-wide initiative to
address the risks associated with agency lending, which became known
as the ALD Initiative.
\10\ Id.
\11\ FINRA Response Letter, at 2.
\12\ Id.
---------------------------------------------------------------------------
B. Proposed FINRA Rule 4330
The Commission received two comments in response to proposed FINRA
Rule 4330. One commenter supported the written authorization
requirement in proposed FINRA Rule 4330(a) ``because it will alert
customers about use of their margin securities and pertinent risks.''
\13\ One commenter stated that language used as a safe harbor in
proposed Supplementary Material .02 should apply only to customer
margin agreements entered into after the effective date of proposed
FINRA Rule 4330.\14\ The commenter further asked that FINRA clarify the
exact language that would comply with the rule as well as where the
language
[[Page 72955]]
should be placed relative to the signature line.\15\ In response to
these comments, FINRA amended the language in proposed Supplementary
Material .02 to delete the specific language that had been included as
a safe harbor. Although the language in proposed Supplementary Material
.02 was identical to the language in NYSE Rule Interpretation 402(b)/
01, some FINRA members had not previously been subject to the
requirements of NYSE Rule Interpretation 402(b)/01. FINRA recognized
that for those members that had not previously been subject to proposed
Supplementary Material .02 the costs to ``re-paper'' customer margin
agreements could be burdensome. Thus, FINRA removed the safe harbor
language in proposed Supplementary Material .02 and added language
stating that the customer account agreement/margin agreement/loan
consent must include ``clear and prominent disclosure that the firm may
lend either to itself or others any securities held by the customer in
its margin account.'' \16\
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\13\ Cornell Letter, at 2.
\14\ SIFMA Letter, at 5.
\15\ Id., at 4-5.
\16\ FINRA Response Letter, at 4.
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Proposed FINRA Rule 4330(b)(2)(A) would require a member to have
reasonable grounds to believe that the customer's loan of securities is
appropriate. One commenter supported the proposed amendments stating
that it will provide additional protection to customers.\17\ Another
commenter supported the provision but suggested that FINRA adopt an
institutional safe harbor similar to FINRA Rule 2111(b).\18\ In
response to these comments, FINRA added new proposed Supplementary
Material .05, which states that ``a member may fulfill the obligation
set forth in paragraph (b)(2)(A) above for an institutional account . .
. by complying with the requirements of Rule 2111(b).'' FINRA further
stated that firms with existing institutional customers under FINRA
Rule 2111(b) should evaluate those customers to ensure they comply with
the requirements of proposed FINRA Rule 4330. Thus, any institutional
customer, regardless of whether the customer meets the requirements of
FINRA Rule 2111(b), would need to also satisfy the requirements in
FINRA Rule 4330.
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\17\ Cornell Letter, at 2.
\18\ SIFMA Letter, at 5.
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Proposed FINRA Rule 4330(b)(2)(B) requires members to provide
customers with certain disclosures relating to a customer's securities
loan transactions. One commenter supported this disclosure requirement
believing it will help customers ``assess the risks and financial
impact associated with securities lending transactions.'' \19\ One
commenter suggested developing an industry standard risk disclosure
form.\20\ FINRA stated that it recognizes the benefits of a standard
disclosure form and understood that creating such a form may take
longer than FINRA's proposed effective date for the rule.\21\ Thus,
FINRA agreed to extend the compliance date for providing disclosures to
customers to 180 days following the effective date of the proposed rule
change. FINRA notes that while it will work with industry groups to
develop such a template, a standard template would not guarantee
compliance with FINRA rules. Further, FINRA stated that members should
tailor their disclosures to fit their particular situation.
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\19\ Cornell Letter, at 2.
\20\ SIFMA Letter, at 6.
\21\ FINRA Response Letter, at 5-6.
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C. Proposed FINRA Rule 4340
The Commission received no comments on proposed FINRA Rule 4340.
IV. Discussion and Commission's Findings
After careful review of the proposed rule change, the comments
received, and FINRA's Response Letter, the Commission finds that the
proposed rule change, as modified by Partial Amendments No. 1 and No.
2, is consistent with the requirements of the Exchange Act and the
rules and regulations thereunder applicable to a national securities
association.\22\ In particular, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Exchange Act,
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, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, 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.\23\
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\22\ In approving this rule change, the Commission notes that it
has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\23\ 15 U.S.C. 78o-3(b)(6).
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More specifically, the Commission believes the proposed new rules
provide important protections for customers who engage in securities
lending transactions. The proposed new rules will provide consistency
throughout the industry with respect to securities lending
transactions. The proposed new rules protect customers by promoting
transparency, establishing uniform books and records requirements,
providing customers with additional disclosures, and providing
redemptions that are free from conflicts of interests.
The Commission believes that FINRA has adequately responded to the
concerns raised by commenters by adding further explanation in the
Supplementary Material for proposed FINRA Rule 4330 and by extending
the compliance date for FINRA Rule 4330(b)(2)(B). These changes were
made in Partial Amendments No. 1 and No. 2, which the Commission
believes adds clarity to the new rules.
For the reasons stated above, the Commission finds that the rule
change is consistent with the Exchange Act and the rules and
regulations thereunder.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\24\ that the proposed rule change (SR-FINRA-2013-035), as
modified by Partial Amendments No. 1 and No. 2, be, and hereby is,
approved.
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\24\ 15 U.S.C. 78s(b)(2).
\25\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-28976 Filed 12-3-13; 8:45 am]
BILLING CODE 8011-01-P
