Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change to FINRA Rules 0190 (Effective Date of Revocation, Cancellation, Expulsion, Suspension or Resignation) and 2040 (Payments to Unregistered Persons) in the Consolidated FINRA Rulebook, and Amend FINRA Rule 8311 (Effect of a Suspension, Revocation, Cancellation, or Bar), 553-561 [2014-30892]
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Federal Register / Vol. 80, No. 3 / Tuesday, January 6, 2015 / Notices
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
tkelley on DSK3SPTVN1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEArca–2014–141 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSEArca–2014–141. 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
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NYSEArca–2014–141, and should be
submitted on or before January 27, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Brent J. Fields,
Secretary.
[FR Doc. 2014–30899 Filed 1–5–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73954; File No. SR–FINRA–
2014–037]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving
Proposed Rule Change to FINRA Rules
0190 (Effective Date of Revocation,
Cancellation, Expulsion, Suspension
or Resignation) and 2040 (Payments to
Unregistered Persons) in the
Consolidated FINRA Rulebook, and
Amend FINRA Rule 8311 (Effect of a
Suspension, Revocation, Cancellation,
or Bar)
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proposed rule change would also adopt
the requirements of NASD Rule 1060(b)
(Persons Exempt from Registration) and
Incorporated NYSE Rule Interpretation
345(a)(i)/03 (Compensation to NonRegistered Foreign Persons Acting as
Finders), as FINRA Rule 2040(c)
(Nonregistered Foreign Finders) in the
consolidated FINRA rulebook without
material change. In addition, the
proposed rule change would amend
FINRA Rule 8311 (Effect of a
Suspension, Revocation, Cancellation,
or Bar), add new Supplementary
Material .01 (Remuneration Accrued
Prior to Effective Date of Sanction or
Disqualification), and adopt the
requirements of NASD IM–2420–1(a)
(Non-members of the Association), as
FINRA Rule 0190 (Effective Date of
Revocation, Cancellation, Expulsion,
Suspension or Resignation).
The proposed rule change was
published for comment in the Federal
Register on October 1, 2014.3 The
Commission received seven comment
letters in response to the Notice of
Filing.4 On November 10, 2014, FINRA
extended the time period in which the
Commission must approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to approve or
disapprove the proposed rule change to
December 30, 2014.5 On December 23,
December 30, 2014.
I. Introduction
On September 10, 2014, Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and
Rule 19b–4 thereunder,2 a proposed rule
change to streamline provisions of
NASD Rule 2410 (Net Prices to Persons
Not in Investment Banking or Securities
Business), NASD Rule 2420 (Dealing
with Non-Members), NASD IM–2420–1
(Transactions Between Members and
Non-Members), NASD IM–2420–2
(Continuing Commissions Policy),
Incorporated NYSE Rule 353 (Rebates
and Compensation), Incorporated NYSE
Rule Interpretation 345(a)(i)/01
(Compensation to Non-Registered
Persons) and Incorporated NYSE Rule
Interpretation 345(a)(i)/02
(Compensation Paid for Advisory
Solicitations), which would be deleted
from the current FINRA rulebook. The
15 17
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
553
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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3 Exchange Act Release No. 73210 (Sept. 25,
2014), 79 FR 59322 (Oct. 1, 2014) (Notice of Filing
of a Proposed Rule Change to Adopt FINRA Rules
0190 (Effective Date of Revocation, Cancellation,
Expulsion, Suspension or Resignation) and 2040
(Payments to Unregistered Persons) in the
Consolidated FINRA Rulebook, and Amend FINRA
Rule 8311 (Effect of a Suspension, Revocation,
Cancellation, or Bar)) (‘‘Notice of Filing’’). The
comment period closed on October 22, 2014.
4 William A. Jacobson, Clinical Professor of Law,
Cornell Law School, and Director, Cornell
Securities Law Clinic (Oct. 17, 2014) (‘‘Cornell’’);
Peter J. Chepucavage, Esq., GC Plexus Consulting
Group (Oct. 21, 2014) (‘‘Plexus’’); William Beatty,
President, North American Securities
Administrators Association and Washington
Securities Commissioner (Oct. 22, 2014)
(‘‘NASAA’’); Howard Spindel, Senior Managing
Director, and Cassondra E. Joseph, Managing
Director, Integrated Management Solutions USA
LLC (Oct. 22, 2014) (‘‘IMS’’); Paul J. Tolley, Senior
Vice President, Chief Compliance Officer,
Commonwealth Financial Network (Oct. 22, 2014)
(‘‘Commonwealth’’); Kevin Zambrowicz, Associate
General Counsel & Managing Director, Securities
Industry and Financial Markets Association (Oct.
22, 2014) (‘‘SIFMA’’); and Catherine T. Dixon,
Chair, Federal Regulation of Securities Committee,
Business Law Section, American Bar Association
(Nov. 5, 2014) (‘‘ABA’’).
5 Letter from Kosha K. Dalal, Associate Vice
President and Associate General Counsel, FINRA to
Katherine England, Assistant Director, Division of
Trading and Markets, Securities and Exchange
Commission, dated Nov. 10, 2014.
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Federal Register / Vol. 80, No. 3 / Tuesday, January 6, 2015 / Notices
2014, FINRA filed a letter responding to
these comments.6
This order approves the proposed rule
change.
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II. Description of the Proposed Rule
As part of the process of developing
a new consolidated rulebook
(‘‘Consolidated FINRA Rulebook’’),7
FINRA is proposing to adopt FINRA
Rule 2040 (Payments to Unregistered
Persons) regarding the payment of
transaction-based compensation by
members to unregistered persons, and
Supplementary Material .01 (Reasonable
Support for Determination of
Compliance with Section 15(a) of the
Exchange Act). The proposed rule
change would streamline provisions of
NASD Rule 2410 (Net Prices to Persons
Not in Investment Banking or Securities
Business), NASD Rule 2420 (Dealing
with Non-Members), NASD IM–2420–1
(Transactions Between Members and
Non-Members), NASD IM–2420–2
(Continuing Commissions Policy),
NYSE Rule 353 (Rebates and
Compensation), NYSE Rule
Interpretation 345(a)(i)/01
(Compensation to Non-Registered
Persons) and NYSE Rule Interpretation
345(a)(i)/02 (Compensation Paid for
Advisory Solicitations), which would be
deleted from the current FINRA
rulebook. The proposed rule change also
would adopt the requirements of NASD
Rule 1060(b) (Persons Exempt from
Registration) and NYSE Rule
Interpretation 345(a)(i)/03
(Compensation to Non-Registered
Foreign Persons Acting as Finders), as
FINRA Rule 2040(c) (Nonregistered
Foreign Finders) in the Consolidated
FINRA Rulebook without material
change. In addition, the proposed rule
change would amend FINRA Rule 8311
(Effect of a Suspension, Revocation,
Cancellation, or Bar), add new
Supplementary Material .01
(Remuneration Accrued Prior to
Effective Date of Sanction or
Disqualification), and adopt the
6 Letter from Kosha K. Dalal, Associate Vice
President and Associate General Counsel, FINRA to
Brent J. Fields, Secretary, Securities and Exchange
Commission, dated Dec. 23, 2014 (‘‘FINRA
Response’’).
7 The current FINRA rulebook consists of (1)
FINRA Rules; (2) NASD Rules; and (3) rules
incorporated from NYSE (‘‘Incorporated NYSE
Rules’’). While the NASD Rules generally apply to
all FINRA members, the Incorporated NYSE Rules
apply only to those members of FINRA that are also
members of the NYSE (‘‘Dual Members’’). The
FINRA Rules apply to all FINRA members, unless
such rules have a more limited application by their
terms. For more information about the rulebook
consolidation process, see Information Notice,
March 12, 2008 (Rulebook Consolidation Process).
For convenience, the Incorporated NYSE Rules are
referred to as the NYSE Rules.
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requirements of NASD IM–2420–1(a)
(Non-members of the Association), as
FINRA Rule 0190 (Effective Date of
Revocation, Cancellation, Expulsion,
Suspension or Resignation).
A. Background
NASD Rule 1060(b) (Persons Exempt
from Registration), NASD Rule 2410
(Net Prices to Persons Not in Investment
Banking or Securities Business), NASD
Rule 2420 (Dealing with Non-Members),
NASD IM–2420–1 (Transactions
Between Members and Non-Members),
and NASD IM–2420–2 (Continuing
Commissions Policy) (collectively, the
‘‘NASD Non-Member Rules’’) govern
payments by members to unregistered
persons. The NASD Non-Member Rules
(other than NASD Rule 1060(b)) were
developed in an era when a registered
broker-dealer could engage in an overthe-counter securities business and elect
not to be a member of a registered
securities association.8 An original
purpose of the NASD Non-Member
Rules was to encourage non-members to
become members by generally
prohibiting members from providing
commissions or discounts/concessions
to non-members.9 Since the adoption of
the NASD Non-Member Rules, the laws
governing broker-dealers have changed,
and today virtually all broker-dealers
doing business with the public are
FINRA members.10
8 See Maloney Act of 1938, Pub. L. 75–719, 52
Stat. 1070, which added Section 15A of the
Exchange Act to provide for the establishment of
national securities associations with authority,
subject to SEC review, to supervise the over-thecounter securities market and promulgate rules
governing voluntary membership of broker-dealers.
9 Section 15A(e)(1) of the Exchange Act states that
‘‘[t]he rules of a registered securities association
may provide that no member thereof shall deal with
any nonmember professional (as defined in
paragraph (2) of this subsection) except at the same
prices, for the same commissions or fees, and on the
same terms and conditions as are by such member
accorded to the general public.’’ Section 15A(e)(2)
of the Exchange Act defines ‘‘nonmember
professional’’ as ‘‘(A) with respect to transactions in
securities other than municipal securities, any
registered broker or dealer who is not a member of
a registered securities association, except such a
broker or dealer who deals exclusively in
commercial paper, bankers’ acceptances, and
commercial bills, and (B) with respect to
transactions in municipal securities, any municipal
securities dealer (other than a bank or division or
department of a bank) who is not a member of any
registered securities association and any municipal
securities broker who is not a member of any such
association.’’ The legislative reports from Congress
on this provision state that exclusion from
membership would in effect be a form of economic
sanction on such non-members. See S. Rep. No.
1455 and H. R. Rep. No 2307, 75th Cong., 3rd Sess.
(1938).
10 Section 15(b)(8) of the Exchange Act provides
that ‘‘[i]t shall be unlawful for any registered broker
or dealer to effect any transaction in, or induce or
attempt to induce the purchase or sale of, any
security (other than commercial paper, bankers’
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As a result, FINRA generally has
interpreted the provisions of the NASD
Non-Member Rules, through
interpretive letters and other guidance,
to prohibit the payment of commissions
or fees derived from a securities
transaction to any non-member that may
be acting as an unregistered brokerdealer. Section 15(a)(1) of the Exchange
Act generally requires any broker-dealer
effecting transactions in securities to be
registered with the SEC. FINRA has
refrained from providing interpretive
guidance on whether a person is acting
as an unregistered broker-dealer, as the
authority to interpret Section 15(a) of
the Exchange Act rests with the SEC.
Registration as a broker-dealer provides
a framework of rules to regulate the
conduct of persons who receive
transaction-based compensation, the
receipt of which can create potential
incentives for abusive sales practices.
SEC guidance states that receipt of
securities transaction-based
compensation is an indication that a
person is engaged in the securities
business and that such person generally
should be registered as a broker-dealer.
B. Proposed FINRA Rule 2040
FINRA is proposing to adopt new
FINRA Rule 2040 (Payments to
Unregistered Persons), which eliminates
the current NASD Non-Member Rules
and related NYSE Non-Member Rules
(discussed further below) and replaces
them with a more straightforward rule.
The proposed rule expressly aligns with
Section 15(a) of the Exchange Act and
its related guidance to determine
whether registration as a broker-dealer
is required for certain persons to receive
transaction-related compensation. As
further discussed in Item II.C. below,
the proposed rule change was published
for comment in Regulatory Notice 09–
69.11 FINRA received seven comment
letters. A significant number of the
commenters expressed concern
regarding the potential regulatory
burden of obtaining SEC no-action
letters to determine whether particular
activities would require registration of
persons as broker-dealers under Section
15(a) of the Exchange Act, and the
proposed deletion of NASD Rule
1060(b) and NYSE Rule Interpretation
345(a)(i)/03 relating to payments to
foreign finders. In an effort to respond
to these concerns, FINRA is proposing
to adopt Supplementary Material .01
acceptances, or commercial bills), unless such
broker or dealer is a member of a securities
association registered pursuant to Section 15A of
this title or effects transactions in securities solely
on a national securities exchange of which it is a
member.’’
11 See Regulatory Notice 09–69 (December 2009).
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(Reasonable Support for Determination
of Compliance with Section 15(a) of the
Exchange Act) to proposed FINRA Rule
2040 to provide guidance to members
regarding the manner in which they can
reasonably support a determination that
an unregistered person is not required to
be registered under Section 15(a) of the
Exchange Act by reason of receiving
payments from the member and the
activities related thereto. FINRA is also
proposing to retain NASD Rule 1060(b)
and NYSE Rule Interpretation 345(a)(i)/
03 relating to foreign finders as
proposed FINRA Rule 2040(c). The
proposed rule sets forth the following
requirements:
• Payments to Unregistered Persons
FINRA is proposing to adopt new
FINRA Rule 2040(a), which prohibits
members or associated persons from,
directly or indirectly, paying any
compensation, fees, concessions,
discounts, commissions or other
allowances to:
(1) Any person that is not registered
as a broker-dealer under Section 15(a) of
the Exchange Act but, by reason of
receipt of any such payments and the
activities related thereto, is required to
be so registered under applicable federal
securities laws and Exchange Act rules
and regulations; or
(2) any appropriately registered
associated person, unless such payment
complies with all applicable federal
securities laws, FINRA rules and
Exchange Act rules and regulations.
The proposed change would make the
rule consistent with FINRA staff
interpretations under NASD Rule 2420
and SEC rules and regulations under
Section 15(a) of the Exchange Act.12
Under the proposal, persons would look
to SEC rules and regulations to
determine whether the activities in
question require registration as a brokerdealer under Section 15(a) of the
Exchange Act. Persons may also rely on
related published guidance issued by
the SEC or its staff in the form of
releases, no-action letters or
interpretations. The proposal would
align the rule with SEC staff guidance
that states that receipt of securities
transaction-based compensation is an
indication that a person is engaged in
the securities business and that such
person generally should be registered as
12 See FINRA Interpretative Letters issued under
NASD Rule 2420: Letter to Richard Schultz, Triad
Securities Corp., dated December 28, 2007; Letter to
Jonathan K. Lagemann, Esq., Law Offices of
Jonathan Kord Lagemann, dated June 27, 2001;
Letter to Jay Adams Knight, Esq., Musick, Peeler &
Garrett LLP, dated March 8, 2001; and Letter to
Michael R. Miller, Esq., Kunkel Miller & Hament,
dated May 31, 2000 (available at https://
www.finra.org/Industry/Regulation/Guidance/
InterpretiveLetters/ConductRules/index.htm).
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a broker-dealer. The proposed change
also prohibits payments to appropriately
registered associated persons unless
such payments comply with applicable
federal securities laws, FINRA rules and
Exchange Act rules and regulations.
FINRA is proposing to adopt
Supplementary Material .01 (Reasonable
Support for Determination of
Compliance with Section 15(a) of the
Exchange Act) to proposed FINRA Rule
2040 to provide guidance to members.
In applying the proposed rule, FINRA
will expect members to determine that
their proposed activities would not
require the recipient of the payments to
register as a broker-dealer and to
reasonably support such determination.
Members that are uncertain as to
whether an unregistered person may be
required to be registered under Section
15(a) of the Exchange Act by reason of
receiving payments from the member
and the activities related thereto can
derive support for their determination
by, among other things, (1) reasonably
relying on previously published
releases, no-action letters or
interpretations from the Commission or
Commission staff that apply to their
facts and circumstances; (2) seeking a
no-action letter from the Commission
staff; or (3) obtaining a legal opinion
from independent, reputable U.S.
licensed counsel knowledgeable in the
area. The member’s determination must
be reasonable under the circumstances
and should be reviewed periodically if
payments to the unregistered person are
ongoing in nature. In addition, a
member must maintain books and
records that reflect the member’s
determination.
• Retiring Representatives
FINRA is also proposing to adopt new
FINRA Rule 2040(b), which codifies
existing FINRA staff guidance on the
payment by members of continuing
commissions to retiring registered
representatives.13 The proposal permits
members to pay continuing
commissions to retiring registered
representatives of the member, after
they cease to be associated with the
member, that are derived from accounts
held for continuing customers of the
retiring registered representative
regardless of whether customer funds or
securities are added to the accounts
during the period of retirement,
13 See FINRA Interpretative Letters issued under
NASD IM–2420–2: Letter to Name Not Public, dated
November 27, 2012; Letter to Ted A. Troutman,
Esquire, Muir & Troutman, dated February 4, 2002;
Letter to Joe Tully, Commonwealth Financial
Network, dated August 9, 2001; and Letter to Peter
D. Koffer, Esq, Twenty-First Securities Corporation,
dated January 21, 2000 (available at https://
www.finra.org/Industry/Regulation/Guidance/
InterpretiveLetters/ConductRules/index.htm).
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555
provided that: (1) A bona fide contract
between the member and the retiring
registered representative providing for
the payments was entered into in good
faith while the person was a registered
representative of the member and such
contract, among other things, prohibits
the retiring registered representative
from soliciting new business, opening
new accounts or servicing the accounts
generating the continuing commission
payments; and (2) the arrangement
complies with applicable federal
securities laws and SEA rules and
regulations.
The proposal defines the term
‘‘retiring registered representative’’ to
mean an individual who retires from a
member (including as a result of a total
disability) and leaves the securities
industry.14 In the case of death of the
retiring registered representative, the
retiring registered representative’s
beneficiary designated in the written
contract or the retiring registered
representative’s estate if no beneficiary
is so designated may be the beneficiary
of the respective member’s agreement
with the deceased representative.
FINRA believes this proposal is
consistent with staff guidance on the
payment of compensation to retiring
representatives.15
• Nonregistered Foreign Finders
In light of comments raised in
response to Regulatory Notice 09–69,
FINRA is proposing to transfer NASD
Rule 1060(b) (Persons Exempt from
Registration) and NYSE Rule
Interpretation 345(a)(i)/03
(Compensation to Non-Registered
Foreign Persons Acting as Finders) with
minor technical changes into the
Consolidated FINRA Rulebook as
FINRA Rule 2040(c).16 As approved by
the SEC in 1993 and 1995, respectively,
NYSE Rule Interpretation 345(a)(i)/03
and NASD Rule 1060(b) are largely
14 See SEC No-Action Letter to the Securities
Industry and Financial Markets Association, 2008
SEC No-Act. LEXIS 695, November 20, 2008. The
letter provides that ‘‘[t]he retiring representative
must sever association with the Firm and with any
municipal securities dealer, government securities
dealer, investment adviser or investment company
affiliates (except as may be required to maintain any
licenses or registrations required by any state) and,
is not permitted to be associated with any other
broker, dealer, municipal securities dealer,
government securities dealer, investment adviser or
investment company, during the term of his or her
agreement. The retiring representative also may not
be associated with any bank, insurance company or
insurance agency (affiliated with the Firm or
otherwise) during the term of his or her agreement
if the retiring representative’s activities relate to
effecting transactions in securities.’’ See also SEC
No-Action Letter to Amy Lee, Chief Compliance
Officer, Co-CEO, Packerland Brokerage Services,
2013 SEC No-Act. LEXIS 237, March 18, 2013.
15 See supra note 14.
16 See supra note 11.
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Federal Register / Vol. 80, No. 3 / Tuesday, January 6, 2015 / Notices
identical provisions and provide that
members and persons associated with a
member may pay transaction-related
compensation to nonregistered foreign
finders, based upon the business of
customers such persons direct to
members, subject to identified
conditions. FINRA is proposing nonsubstantive, technical changes to the
proposed rule text to make it easier to
read. Specifically, proposed FINRA Rule
2040(c) would provide that a member
may pay to a nonregistered foreign
finder (the ‘‘finder’’) transaction-related
compensation based upon the business
of customers the finder directs to the
member if the following conditions are
met (‘‘foreign finders exception’’):
(1) The member has assured itself that
the finder who will receive the
compensation is not required to register
in the United States as a broker-dealer
nor is subject to a disqualification as
defined in Article III, Section 4 of
FINRA’s By-Laws, and has further
assured itself that the compensation
arrangement does not violate applicable
foreign law;
(2) The finder is a foreign national
(not a U.S. citizen) or foreign entity
domiciled abroad;
(3) the customers are foreign nationals
(not U.S. citizens) or foreign entities
domiciled abroad transacting business
in either foreign or U.S. securities;
(4) customers receive a descriptive
document, similar to that required by
Rule 206(4)–3(b) of the Investment
Advisers Act of 1940 (‘‘Investment
Advisers Act’’), that discloses what
compensation is being paid to finders;
(5) customers provide written
acknowledgment to the member of the
existence of the compensation
arrangement and such acknowledgment
is retained and made available for
inspection by FINRA;
(6) records reflecting payments to
finders are maintained on the member’s
books, and actual agreements between
the member and the finder are available
for inspection by FINRA; and
(7) the confirmation of each
transaction indicates that a referral or
finders fee is being paid pursuant to an
agreement.
The rule provides that if all the
conditions set forth in the rule are
satisfied, members can pay transactionrelated compensation to nonregistered
foreign finders based on the business of
non-U.S. customers that finders refer to
members. Specifically, the rule permits
compensation to ‘‘be made on an
ongoing basis and tied to such variables
as the level of business generated or
assets under control, notwithstanding
the fact that the foreign finders’ sole
involvement would be the initial
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referral to a member.’’ 17 The SEC
Foreign Finders Approval Order states
that ‘‘[t]he provision was intended to
give members the opportunity to
enhance their competitive position in
foreign countries where new accounts
are frequently opened on a referral basis
with ongoing compensation for such
referral.’’ 18
Proposed FINRA Rule 2040(c) would
have the same scope as the current rule
and continue to allow ongoing
transaction-based payments to
nonregistered foreign finders under the
limited circumstances set forth in the
current rule. As in the current rule,
‘‘[w]hile the foreign finders’ sole
involvement would be the initial referral
to a member or member organization [of
non-U.S. customers to the firm],
compensation could be made on an
ongoing basis and tied to such variables
as the level of business generated or
assets under control. All accounts
referred by such foreign finders would
be carried on the books of the
member.’’ 19 Similar to NASD Rule
1060(b), any activities beyond the initial
referral of non-U.S. customers and
payment of transaction-based
compensation for any such activities
would not be within the permissible
scope of the foreign finders exception as
set forth in proposed FINRA Rule
2040(c). Based solely on its activities in
compliance with proposed FINRA Rule
2040(c), the foreign finder would not be
considered an associated person of the
member. However, unless otherwise
permitted by the federal securities laws
or FINRA rules, a person who receives
commissions or other transaction-based
compensation in connection with
securities transactions generally has to
be a registered broker-dealer or an
appropriately registered associated
person of a broker-dealer who is
supervised by a broker-dealer. Members
that engage foreign finders would be
required to have reasonable procedures
that appropriately address the limited
scope of activities permissible under
such arrangements.20
17 See Securities Exchange Act Release No. 32431
(June 8, 1993), 58 FR 33128 (June 15, 1993) (Order
Approving File No. SR–NYSE–92–33 Relating to an
Interpretation to NYSE Rule 345 (Employees—
Registration, Approval, Records)) (‘‘SEC Approval
Order of NYSE Rule 345 Interpretation’’). See also
Securities Exchange Act Release No. 35361
(February 13, 1995), 60 FR 9417 (February 17, 1995)
(Order Approving File No. SR–NASD–94–51) (‘‘SEC
Foreign Finders Approval Order’’).
18 See supra note 13.
19 See Securities Exchange Act Release No. 34941
(November 4, 1994), 59 FR 56102 (November 10,
1994) (Notice of Filing of File No. SR–NASD–94–
51). See also SEC Approval Order of NYSE Rule 345
Interpretation.
20 See SEC Foreign Finders Approval Order.
FINRA notes that the scope of permissible activities
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C. Amendments to FINRA Rule 8311
• FINRA Rule 8311
FINRA is proposing amendments to
FINRA Rule 8311 to eliminate
duplicative provisions in NASD IM–
2420–2 and to clarify the scope of the
rule on payments by members to
persons subject to suspension,
revocation, cancellation, bar (each a
‘‘sanction’’) or other disqualification.
The proposed rule provides that if a
person is subject to a sanction or other
disqualification, a member may not
allow such person to be associated with
it in any capacity that is inconsistent
with the sanction imposed or
disqualified status, including a clerical
or ministerial capacity. The proposed
rule further provides that a member may
not pay or credit to any person subject
to a sanction or disqualification, during
the period of the sanction or
disqualification or any period thereafter,
any salary, commission, profit, or any
other remuneration that the person
might accrue, not just earn, during the
period of the sanction or
disqualification. However, a member
may make payments or credits to a
person subject to a sanction that are
consistent with the scope of activities
permitted under the sanction where the
sanction solely limits an associated
person from conducting specified
activities (such as a suspension from
acting in a principal capacity) or to a
disqualified person that has been
approved (or is otherwise permitted
pursuant to FINRA rules and the federal
securities laws) to associate with a
member.
Specifically, the proposal clarifies
that:
(1) Other disqualifications, not just
suspensions, revocations, cancellations
or bars, are subject to the rule (and the
rule is not limited to orders issued by
FINRA or the SEC);
(2) a member may not allow a person
subject to a sanction or disqualification
to ‘‘be’’ associated with such member in
any capacity that is inconsistent with
the sanction imposed or disqualified
status, including a clerical or ministerial
capacity, not simply ‘‘remain’’
associated as provided in the current
rule;
(3) a member may not pay any
remuneration to a person subject to a
sanction or disqualification, not just
payments that result directly or
indirectly from any securities
transaction; and
and associated regulatory requirements differ
between foreign finders and foreign associates, who
are registered persons of the member. See also
NASD Rule 1100 (Foreign Associates).
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(4) the rule applies to any salary,
commission, profit or remuneration that
the associated person might ‘‘accrue,’’
not just ‘‘earn’’ during the period of a
sanction or disqualification, not just
suspension.
FINRA is also proposing to add a new
paragraph to the rule that would
expressly permit a member to pay to any
person subject to a sanction or
disqualification any remuneration
pursuant to an insurance or medical
plan, indemnity agreement relating to
legal fees, or as required by an
arbitration award or court judgment.
FINRA believes that these exceptions
strike the correct balance by permitting
certain key payments.
• Proposed Supplementary Material
.01
In addition, FINRA is proposing to
add new Supplementary Material .01
(Remuneration Accrued Prior to
Effective Date of Sanction or
Disqualification) that relates to
commissions accrued by a person prior
to the effective date of a sanction or
disqualification. The proposed
supplementary material would permit a
member to pay a person that is subject
to a sanction or disqualification
remuneration that the member can
evidence accrued to the person prior to
the effective date of the sanction or
disqualification. However, a member
may not pay any remuneration that
accrued to the person that relates to or
results from the activity giving rise to
the sanction or disqualification, and any
such payment or credit must comply
with applicable federal securities laws.
FINRA believes that adopting this new
provision is necessary to address
questions by the industry on a member’s
ability to pay commissions and other
remuneration that was accrued by the
person prior to a sanction or
disqualification going into effect. FINRA
also believes the supplementary
material, together with the proposed
amendments discussed above, clarify
that a member may not pay trail
commissions to a person that may
accrue during the period of the sanction
or disqualification; rather, the member
can only make such payments where the
member can evidence that they accrued
to the person prior to the effective date
of the sanction or disqualification.
D. Adoption of New General Standard—
FINRA Rule 0190
In addition, FINRA is proposing to
adopt a new general standard, proposed
FINRA Rule 0190 (Effective Date of
Revocation, Cancellation, Expulsion,
Suspension or Resignation), that is
based largely on provisions of NASD
IM–2420–1(a) and would provide that a
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member will be treated as a nonmember of FINRA from the effective
date of any order or notice from FINRA
or the SEC issuing a revocation,
cancellation, expulsion or suspension of
its membership. In the case of
suspension, a member will be
automatically reinstated to membership
in FINRA at the termination of the
suspension period.
E. NASD and NYSE Rules To Be Deleted
FINRA proposes to eliminate the
following NASD and NYSE Rules and
related interpretations because FINRA
believes that proposed FINRA Rule 2040
simplifies and clarifies the meaning of
such rules consistent with Section 15(a)
of the Exchange Act. Specifically, NASD
Rule 2410, NASD Rule 2420, NASD IM–
2420–1, NASD IM–2420–2, NYSE Rule
353, NYSE Rule Interpretation 345(a)(i)/
01 and NYSE Rule Interpretation
345(a)(i)/02 will be consolidated into
proposed FINRA Rule 2040, providing
members with one concise rule that
outlines the applicable requirements for
payments to non-members.
• NASD Rule 2410
NASD Rule 2410 (Net Prices to
Persons Not in Investment Banking and
Securities Business) prohibits payments
or concessions by members to ‘‘any
person not actually engaged in the
investment banking or securities
business.’’
• NASD Rule 2420
NASD Rule 2420 (Dealing with NonMembers) generally prohibits members
from dealing with, or making payments
to, non-member broker-dealers, except
at the same prices, fees or concessions
offered to the general public. NASD
Rule 2420(b) specifically prohibits
members from joining any non-member
broker-dealer syndicate or group in
connection with the sale of securities.
NASD Rule 2420(c) provides that
members may pay concessions and fees
to a non-member broker or dealer in a
foreign country who is not eligible for
membership, provided the member
obtains an agreement from such foreign
broker or dealer in making sales of
securities within the United States that
such foreign broker or dealer will act in
accordance with the general
requirements of the rule to prohibit the
payment of concessions or discounts to
non-members that are not allowed to the
general public. NASD Rule 2420(d)
provides restrictions on payments by or
to persons that have been suspended or
expelled.
• NASD IM–2420–1
NASD IM–2420–1 (Transactions
between Members and Non-Members)
provides certain exemptions from the
general prohibition on arrangements
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557
with non-members set forth in NASD
Rule 2420. For example, the rule
provides exemptions for arrangements
with certain non-members relating to
transactions in ‘‘exempted securities,’’
or transactions on a national securities
exchange. The rule further clarifies that
a firm that is suspended or expelled
from FINRA membership, or whose
registration is revoked by the SEC, is to
be considered a non-member for
purposes of the rule.
• NASD IM–2420–2
NASD IM–2420–2 (Continuing
Commissions Policy) allows members to
pay continuing commissions to former
registered representatives after they
cease to be employed by a member, if,
among other things, a bona fide contract
between the member and the registered
representative calling for the payments
was entered into in good faith while the
person was a registered representative of
the employing member. The rule states
that such contracts cannot permit the
solicitation of new business or the
opening of new accounts by persons
who are not registered, and must
conform with all applicable laws and
regulations. The rule also provides that
NASD Rule 2830(c) (Investment
Company Securities, Conditions for
Discounts to Dealers) should not be
interpreted to require a sales agreement
for a dealer to receive commissions on
direct payments by clients or automatic
dividend reinvestments. The rule
further contains a prohibition on the
payment of any kind by a member to
any person who is not eligible for
FINRA membership or eligible to be
associated with a member because of
any disqualification, such as revocation,
expulsion or suspension that is still in
effect. The rule recognizes the validity
of contracts entered into in good faith to
allow retired representatives to receive
continuing compensation on their
accounts or to designate a widow or
other beneficiary; however, the rule
states that members are not required to
enter into such contracts and FINRA
will not specify the terms of such
contracts.
• NYSE Rule 353
NYSE Rule 353 (Rebates and
Compensation) prohibits a member,
principal executive, registered
representative or officer from, directly
or indirectly, rebating to any person any
part of the compensation he receives
from the solicitation of orders for the
purchase or sale of securities or other
similar instruments for the accounts of
customers of the member, or pay such
compensation, or any part thereof, as a
bonus, commission, fee or other
consideration for business sought or
procured for him or for any other
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member. NYSE Rule 353(b) further
provides that a member, principal
executive, registered representative or
officer cannot be compensated for
business done by or through his
employer after the termination of his
employment except as may be permitted
by the NYSE.
• NYSE Rule Interpretations
345(a)(i)/01 and/02
NYSE Rule Interpretation 345(a)(i)/01
(Compensation to Non-Registered
Persons) prohibits a member from
paying to nonregistered persons
compensation based upon the business
of customers they direct to the member
if such compensation is, among other
things, formulated as a direct percentage
of commissions generated and is other
than on an isolated basis.
NYSE Rule Interpretation 345(a)(i)/02
(Compensation Paid for Advisory
Solicitations) provides that a member
that is also registered with the SEC as
an investment adviser may enter into
arrangements that comply with Rule
206(4)–3 (Cash Payments for Client
Solicitations) of the Investment
Advisers Act.
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III. Description of Comments on the
Proposal and FINRA’s Response
As noted above, the Commission
received seven comment letters in
response to the Notice of Filing.21 Four
commenters generally supported
FINRA’s efforts to consolidate and
streamline rules relating to payments to
unregistered persons.22 Several
commenters suggested changes to the
proposed rules, which are discussed
further below.
A. Proposed FINRA Rule 2040(a) and
the Focus on Receipt of Transaction
Based Compensation
One commenter stated that it supports
proposed Rule 2040(a) but seeks clarity
on proposed Supplementary Material
.01 (Reasonable Support for
Determination of Compliance with
Section 15(a) of the Exchange Act),
which is discussed in detail in Section
III.D. below.23 One commenter
expressed concern that, without a clear
regulatory framework in place, the
receipt of transaction-based
compensation will lead to abusive
practices.24 As such, the commenter
believed that registration should be
required for individuals that receive
transaction-based compensation because
‘‘such registration is integral to the
regulation of firms and individuals . . .
21 See
note 4, supra.
22 SIFMA, NASAA, Cornell and ABA.
23 SIFMA.
24 NASAA.
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and exceptions to this principle should
be rare, and when implemented they
should be highly prescriptive.’’ 25
One commenter disagreed with
FINRA’s focus on the ‘‘receipt of
transaction-based compensation’’ as the
main factor for determining whether
registration as a broker-dealer is
required.26 The commenter specifically
cited recent case law pointing to other
factors.27 The commenter stated that
FINRA should consider all of the
relevant factors before FINRA and the
SEC adopt any new rule by which a firm
can determine whether a person must
register in accordance with Section
15(a) of the Exchange Act.28 The
commenter suggested that FINRA either
withdraw the proposed rule change or
make substantial modifications to it to
address these concerns.29
FINRA disagrees that the proposed
rule focuses only on the receipt of
transaction-based compensation as the
determinative factor for who is required
to register as a broker-dealer under the
Exchange Act.30 FINRA states that while
the proposed rule change does
specifically include ‘‘receipt of any such
payments,’’ as a factor, the proposed
text also expressly includes ‘‘and the
activities related thereto.’’ 31 FINRA
recognizes that SEC guidance in this
area provides that certain activities may
be deemed (alone or in combination) to
confer ‘‘broker’’ status,32 and the receipt
of transaction-based compensation
coupled with these activities may trigger
the requirement to register as a brokerdealer under the Exchange Act.33 FINRA
believes the proposed rule change is
consistent with current SEC rules and
guidance.34
B. Proposed FINRA Rule 2040(b)—
Retiring Representatives
Three commenters supported FINRA’s
proposed creation of a concise
regulatory framework regarding the
payment of continuing commissions to
retiring registered representatives by
member firms and noted that the
proposed rule effectively consolidates
25 Id.
26 Commonwealth.
27 Id. (citing SEC v. Kramer, 778 F. Supp. 2nd
1320 (M.D. Fla. 2011) and SEC v. John J. Bravata,
et al., Civil Action No. 09–cv–12950 (E.D. Mich.)
(Lawson, J.).
28 Commonwealth.
29 Id.
30 FINRA Response at 4.
31 Id.
32 See Paul Anka, SEC No-Action Letter (available
July 24, 1991). See also Muni Auction Inc., SEC NoAction Letter (available March 13, 2000) and Bond
Globe, Inc., SEC No-Action Letter (available
February 6, 2001).
33 FINRA Response at 4.
34 Id.
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existing guidance.35 In contrast, one
commenter stated that the proposal
should be more explicit on the
restrictions surrounding continuing
compensation that can be paid to retired
representatives.36 The commenter noted
that FINRA makes reference to and
asserts a similarity between its current
proposal and the prior SEC no-action
letter issued to SIFMA on the topic, but
NASAA believed that the staff guidance
contains a more detailed discussion of
the topic.37 While the proposed rule
does not expressly list each condition
set forth in prior SEC no-action letters,
FINRA believes that the proposed rule
change incorporates the prior guidance
issued by the SEC staff by expressly
requiring that any proposed
arrangement with a retiring
representative must comply with federal
securities laws and Exchange Act rules
and regulations.38
C. Proposed FINRA Rule 2040(c)—Non
Registered Foreign Finders
1. Support for Retaining NASD Rule
1060(b)
In Regulatory Notice 09–69, FINRA
had initially proposed to delete NASD
Rule 1060(b) because it believed the
activity should be governed by the
general requirements of proposed
FINRA Rule 2040(a). However, based on
the comments received in response to
Regulatory Notice 09–69, FINRA
proposed to transfer NASD Rule 1060(b)
unchanged into the consolidated FINRA
rulebook. One commenter largely
supported the proposed rule change, but
seeks clarification of certain language.39
Three commenters expressed concern
that FINRA missed the opportunity to
provide much needed clarity in the area
of foreign finders and the compensation
they can be paid.40 One commenter
expressed concern that proposed Rule
2040(c) and Supplementary Material .01
‘‘create overly broad and vaguely
defined safe havens for nonregistered
individuals that receive payments
related to securities transactions.’’ 41
2. Clarification That Foreign Finder
Under Rule 2040(c) Is Not a ‘‘Person
Associated With a Member’’
One commenter urged FINRA to
clarify that a foreign finder is not a
‘‘person associated with a member,’’ as
that term is defined under the FINRA
35 SIFMA,
ABA and IMS.
36 NASAA.
37 Id.
38 FINRA
Response at 4.
39 SIFMA.
40 IMS,
Plexus and Commonwealth.
41 Cornell.
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By-Laws.42 The commenter expressed
concern that by relocating this
provision, which is currently contained
in NASD Rule 1060(b) to new FINRA
Rule 2040, FINRA may not have fully
incorporated existing guidance and may
have ‘‘changed the character of the
provision from a registration ‘safe
harbor’ to a prescriptive rule that sets
forth the only permissible basis on
which transaction-based compensation
may be paid to a foreign finder.’’ 43
3. Proposed Changes to Rule Text
One commenter recommended that
proposed Rule 2040(c)(1) be amended to
eliminate the use of a subjective
‘‘assurance’’ standard by revising the
language to read: ‘‘the finder who will
receive the compensation is not
required to register in the United States
as a broker dealer nor is subject to
disqualification as defined in Article III,
Section 4 of FINRA’s By-Laws, and the
compensation arrangement does not
violate applicable foreign law.’’ 44 The
commenter stated that the ‘‘assurance’’
standard is unacceptably subjective
because it depends on a specific
member’s knowledge, resources, and
discretion and institutional investment
firms may be able to hire outside
counsel to determine whether a given
transaction would violate foreign law,
whereas a smaller firm may perform its
own research and (incorrectly) conclude
that the same transaction does not
violate foreign law.45
One commenter suggested that
proposed Rule 2040(c)(2) and (3) should
be amended to permit members to focus
on the residency, instead of the
citizenship, of customers as this
provides a ‘‘brighter and more
enforceable line for all concerned and
that the Commission has recognized
residency as a better policy guide for the
proper application of the broker-dealer
registration requirements, except in very
limited circumstances.’’ 46 The
commenter believed that the
requirements in the proposed rule
change that finders not be U.S. citizens
and customers be foreign nationals (not
U.S. citizens) impose an undue
burden.47
One commenter stated that the
conditions a firm must satisfy to rely on
proposed Rule 2040(c) (e.g., determining
whether the finder is not required to
register as a U.S. broker-dealer and not
subject to a disqualification under
FINRA’s By-Laws, the compensation
arrangement does not violate applicable
foreign law, etc.) will increase
compliance costs for firms, particularly
when outside counsel has to be
retained.48 In addition, the commenter
noted that the additional disclosure
requirements and recordkeeping
requirements would be costly for firms,
especially for small firms.49
3. Scope of Foreign Finders Proposal Is
Not Comprehensive
Two commenters expressed concern
that the scope of the proposed rule
change appears to be too restrictive.50
Both commenters stated that as a result
of language in the Proposing Release
that proposed Rule 2040(c) permits
compensation when the foreign finder’s
sole involvement is the initial referral to
the member, any activities beyond the
initial referral of non-U.S. customers
and payment of transaction-based
compensation for any such activities
‘‘would not be within the permissible
scope of the foreign finders exception as
set forth in proposed FINRA Rule
2040(c).’’ 51
One commenter stated that the
Existing Nonregistered Foreign Finder
Rules include NASD Rule 1060(b) and
NYSE Rule Interpretation 345(a)(i)/03 as
a safe harbor, not as an exclusive means
of compliance with the Existing
Nonregistered Foreign Finder Rules, and
requested that the proposed rule
language be clarified with the use of the
phrase ‘‘unless otherwise permitted by
the federal securities laws or FINRA
rules,’’ because there may be other
permissible activities, beyond the initial
referral, that would be within the
permissible scope of the foreign finders
exception.52 One commenter
recommended that FINRA clarify the
proposed rule text to permit the
payment of compensation to foreign
finders so long as the activities of the
foreign finder are otherwise permitted.53
The commenter also argued that the
inclusion of the word ‘‘sole’’ in the
Proposing Release is unnecessarily
restrictive and anti-competitive.54
One commenter requested additional
guidance to assist in the implementation
and operation of proposed Rule
2040(c).55 Specifically, the commenter
noted that proposed Rule 2040(c)(4)
requires that ‘‘customers receive a
descriptive document, similar to that
required by Rule 206(4)–3(b) of the
Investment Advisers Act, that discloses
what compensation is being paid to
finders.’’ 56 The commenter stated that
investment advisers must disclose the
additional amount that will be charged
to the investment advisory fee (normally
expressed as a percent of assets under
management) and the differential
attributable to the finder arrangement
and, in general, the nature of fees
between an investment adviser and its
clients differ from the nature of fees
between a broker-dealer and its
customers.57 Therefore, the commenter
believed that it would be useful to have
examples of how the condition would
operate.58
One commenter believed that the
proposed rule would provide the SEC
with an opportunity to provide clarity
in the area of finders and, moreover,
argued that allowing FINRA to adopt the
SEC’s standard is not efficient.59 The
commenter expressed concern about the
certain staff guidance, in particular the
Paul Anka SEC no-action letter, which
it argued narrowed the issue to whether
a transaction fee is paid.60 The
commenter further stated that the
industry believes it is safe to pay fixed
fees to employees or finder/consultants
and urged the Commission to provide
clarity on the Paul Anka letter and the
transaction fee test.61
4. FINRA Response
FINRA responds that it has proposed
to transfer NASD Rule 1060(b)
unchanged into the consolidated
rulebook in response to comments it
received on Regulatory Notice 09–69.62
FINRA states that the proposed rule
change does not seek to address all
circumstances under which payments
may be made by U.S. broker dealers to
foreign finders.63 In addition, the
proposed rule carries over a narrow safe
harbor that permits a firm to pay ongoing compensation to a foreign finder
under the conditions set forth in the
provision.64 FINRA recognizes that the
proposed rule change does not address
all open issues with respect to the
payment of transaction-based
compensation to foreign finders, but
believes that this type of comprehensive
rulemaking or guidance is outside the
56 Id.
57 Id.
48 IMS.
58 Id.
49 Id.
42 ABA.
50 SIFMA
43 Id.
51 Id.
60 Id.
44 Cornell.
52 SIFMA.
61 Id.
45 Id.
53 ABA.
62 FINRA
46 ABA.
54 Id.
63 Id.
47 Id.
55 SIFMA.
64 Id.
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and ABA.
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scope of this proposal.65 To the extent
that additional interpretive issues
remain, FINRA plans to work with SEC
staff on issuing related guidance, as
appropriate.66
FINRA declines to amend the
proposed rule text or provide examples
as suggested by the commenters as it is
not proposing to make any substantive
changes to the provision.67 FINRA does
not intend to change the meaning or
scope of the proposed provision or its
related guidance by relocating the
provision from the Series 1000 rules of
the NASD rulebook to the Series 2000
rules of the FINRA rulebook. Similar to
NASD Rule 1060(b) and NYSE Rule
Interpretation 345(a)(i)/03, proposed
Rule 2040(c) is not intended to be the
only means by which a member may
pay compensation to a foreign finder.
FINRA states that members may rely on
other applicable federal securities laws
and regulations where the activities of a
foreign finder go beyond the scope
permitted by the proposed rule (e.g., the
initial referral of a customer to the
member).68
FINRA also reiterates that, as stated in
the Proposing Release, based solely on
its activities in compliance with
proposed FINRA Rule 2040(c), the
foreign finder would not be considered
an associated person of the member.69
Further, FINRA believes the word
‘‘solely’’ is critical and that any
activities by the foreign finder beyond
the initial referral of the customer
would no longer allow a firm to rely on
the ‘‘safe harbor’’ established by the
proposed rule and may require
registration under Section 15(a) of the
Exchange Act or result in association
with the member under the FINRA ByLaws.70 Therefore, FINRA maintains
that the inclusion of this restriction is
not new and has always been
understood to be part of the provision.
D. Proposed FINRA Rule Supplementary
Material .01 (Reasonable Support for
Determination of Compliance With
Section 15(a) of the Exchange Act)
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1. Requests To Clarify Scope and Terms
Four commenters had concern with
the scope and requirements of proposed
Supplementary Material .01.71
Specifically, these commenters
expressed concern with the third prong
of the proposed rule that allows a firm
to obtain a ‘‘legal opinion’’ from
independent and reputable U.S.
licensed counsel.72 The commenters
stated that seeking SEC no-action letters
or opinions of ‘‘outside’’ ‘‘reputable’’
and ‘‘knowledgeable’’ counsel will be
burdensome and costly, especially for
small firms. One commenter argued
that, among other burdens, the proposal
would mean that in-house counsel is
automatically disqualified from
rendering such an opinion, even if that
counsel is prepared and qualified, by
reputation and knowledge, to issue an
objective opinion.73 One commenter
urged FINRA to provide greater
flexibility in the range of measures that
a member firm may rely on to
‘‘reasonably support’’ its determination
and suggested that proposed Rule
2040(a)(3) be amended to provide that a
member firm support its determination
based on ‘‘advice of knowledgeable
outside counsel’’ and make clear that
the enumerated bases for determining
that the necessary ‘‘reasonable support’’
exists are not exclusive.74
One commenter stated that
determining whether counsel is
‘‘reputable’’ or ‘‘knowledgeable in the
area’’ depends on the market in which
he or she practices and the member’s
discretion and requested clarification as
to whether ‘‘area’’ refers to geography or
legal practice.75 One commenter stated
that the concepts of ‘‘reputable’’ and
‘‘knowledgeable’’ are subjective and the
costs of implementing ‘‘these mandates
are likely prohibitive and
disproportionate to any economic
benefit the firm might receive.’’ 76 One
commenter requested further guidance
to illustrate the standard ‘‘reasonable
under the circumstances’’ as well as
guidance on the expected frequency of
the periodic review.77
2. Other Comments
Three commenters believed that
FINRA should provide greater clarity on
when and under what circumstances
payments to unregistered foreign finders
are permitted.78 One commenter
objected to the proposed rule arguing
that, instead of providing clarity, FINRA
has imposed five additional conditions
by proposing Supplementary Material
.01.79 The commenter further argued
that FINRA did not address the impact
of the proposed rule change on several
activities that may be exempt from
broker-dealer registration through SEC
or FINRA guidance.80
One commenter asserted that the
addition of this Supplementary Material
.01 mitigates some of the concerns
previously raised by them in response to
Regulatory Notice 09–69, but they
remain concerned with the complex
issues surrounding the compensation of
unregistered persons that they stated is
largely unaddressed by the current
proposal.81
One commenter stated that the
‘‘reasonable reliance’’ standard in
Supplementary Material .01 depends
almost entirely on the judgment of
broker-dealers that have a financial
incentive to interpret materials
broadly.82 Further, the commenter
stated that although the Supplementary
Material is intended to mitigate the
burden of determining whether Section
15(a) requires registration, the
uncertainty of a ‘‘reasonable reliance’’
standard invites a much costlier
alternative: private dispute resolution,
administrative hearings, or litigation.83
3. FINRA’s Response
FINRA states that it is proposing to
adopt Supplementary Material .01
because it recognizes the potential costs
and burdens of obtaining a firm-specific,
no-action letter from the SEC.84 The
proposed supplementary material is
intended to clarify that firms may rely
on other means to demonstrate
compliance and provides firms with the
flexibility to rely on other options that
may be less costly and time
consuming.85
FINRA does not intend proposed
Supplementary Material .01 to be an
exhaustive list by which firms can make
a reasonable determination.86 FINRA
states that a legal opinion from
independent, reputable U.S. licensed
counsel knowledgeable in the area is not
the only means available to firms.
FINRA notes that firms may continue to
rely on the advice of in-house counsel
or foreign counsel under prong 1 that
permits a firm to make a determination
by ‘‘reasonably relying on previously
published releases, no-action letters or
interpretations from the Commission or
Commission staff that apply to its facts
and circumstances.’’ 87
FINRA declines to define how
frequently a firm must review its
determination under the proposed rule
72 Id.
80 Id.
65 Id.
73 IMS.
81 NASAA.
66 Id.
74 ABA.
82 Cornell.
75 Cornell.
83 Id.
68 Id.
76 IMS.
84 FINRA
69 Id.
77 SIFMA.
85 FINRA
67 FINRA
Response at 8.
70 Id.
71 See
78 IMS,
ABA, SIFMA, IMS and Cornell.
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Commonwealth, and Plexus.
79 IMS.
PO 00000
Frm 00080
Fmt 4703
Sfmt 4703
Response at 9.
Response at 9–10.
86 FINRA Response at 10.
87 Id.
E:\FR\FM\06JAN1.SGM
06JAN1
Federal Register / Vol. 80, No. 3 / Tuesday, January 6, 2015 / Notices
tkelley on DSK3SPTVN1PROD with NOTICES
because the review must be reasonable
based on the nature and scope of the
activity in question and therefore
requires a factual review. FINRA
believes, however, that an annual
review for on-going payments generally
would be reasonable, absent evidence of
activities by the recipient of the
payments that raise red flags.88
IV. Discussion and Commission
Findings
The Commission has carefully
considered the proposal, the comments
received, and FINRA’s responses to the
comments. Based on its review of the
record, the Commission finds that the
proposal is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities association.89
In particular, the Commission finds
that the proposed rule change is
consistent with the provisions of
Section 15A(b)(6) of the Act, which
requires, among other things, that
FINRA’s rules be designed to prevent
fraudulent and manipulative acts and
practices; promote just and equitable
principles of trade; and, in general,
protect investors and the public
interest.90
The proposed rule change will clarify
and streamline several NASD and NYSE
rules relating to payments to
unregistered persons for adoption as
FINRA Rules in the new Consolidated
FINRA Rulebook. Specifically, proposed
FINRA Rule 2040(a) aligns with Section
15(a) of the Exchange Act and its related
guidance to determine whether
registration as a broker-dealer is
required for certain persons to receive
transaction-related compensation;
proposed FINRA Rule 2040(b) codifies
existing FINRA guidance on the
payment by members of continuing
commissions to retiring registered
representatives consistent with the
Commission’s guidance in this area; and
proposed FINRA Rule 2040(c) adopts
the foreign finders provisions of NASD
Rule 1060(b) and NYSE Rule
Interpretation 345(a)(i)/03 with
technical changes. The amendments to
FINRA Rule 8311 eliminate duplicate
provisions in NASD IM–2420–2 and
clarify the scope of the rule on
payments by members to persons
subject to sanctions. Commenters’
suggestions that the SEC (or FINRA)
provide additional guidance on
‘‘finders’’ are outside the scope of this
88 Id.
89 In approving the proposal, as amended, the
Commission has considered the impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
90 15 U.S.C. 78o–3(b)(6).
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rule filing, and thus outside the scope
of this order.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,91 that the
proposed rule change (SR–FINRA–
2014–037) be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.92
Brent J. Fields,
Secretary.
[FR Doc. 2014–30892 Filed 1–5–15; 8:45 am]
BILLING CODE 8011–01–P
561
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
SECURITIES AND EXCHANGE
COMMISSION
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[Release No. 34–73956; File No. SR–C2–
2014–029]
1. Purpose
Self-Regulatory Organizations; C2
Options Exchange, Incorporated;
Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change Relating to Fees for the C2
Book Depth Data Feed and Certain
Other C2 Real-Time Data Feeds
December 30, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
17, 2014, C2 Options Exchange,
Incorporated (the ‘‘Exchange’’ or ‘‘C2’’)
filed with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
C2 Options Exchange, Incorporated
(the ‘‘Exchange’’ or ‘‘C2’’) proposes to
establish fees for the C2 Book Depth
Data Feed and amend fees for certain
other C2 real-time data feeds. The text
of the proposed rule change is available
on the Exchange’s Web site (https://
www.c2exchange.com/Legal/), at the
Exchange’s Office of the Secretary, and
at the Commission’s Public Reference
Room.
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
The purpose of the proposed rule
change is to: (1) Establish fees for the C2
Book Depth Data Feed; (2) amend fees
for the C2 Complex Order Book (‘‘COB’’)
Data Feed; and (3) establish fees for
distribution of C2 data via a ‘‘Display
Only Service’’ (as defined below). These
data feeds are made available by C2’s
affiliate Market Data Express, LLC
(‘‘MDX’’).
BBO, Book Depth and COB Data Feeds
BBO Data Feed: The BBO Data Feed
is a real-time, low latency data feed that
includes the following content: (i)
Outstanding quotes and standing orders
at the best available price level on each
side of the market, with aggregate size
(‘‘BBO data’’), and last sale data 3; (ii)
totals of customer versus non-customer
contracts at the BBO, (iii) All-or-None
contingency orders priced better than or
equal to the BBO, (iv) BBO and last sale
data for complex strategies (e.g.,
spreads, straddles, buy-writes, etc.); (v)
expected opening price (‘‘EOP’’) and
expected opening size (‘‘EOS’’)
information that is disseminated prior to
the opening of the market and during
trading rotations, (vi) end-of-day
(‘‘EOD’’) summary messages that are
disseminated after the close of a trading
session that include summary
information about trading in C2 listed
options (i.e., product name, opening
price, high and low price during the
trading session and last sale price), (vii)
‘‘recap messages’’ that are disseminated
during a trading session any time there
is a change in the open, high, low or last
sale price of a C2 listed option, as well
as product name and total volume
91 15
92 17
PO 00000
Frm 00081
Fmt 4703
Sfmt 4703
3 ‘‘Best bid and offer’’ or ‘‘BBO’’ data is sometimes
referred to as ‘‘top-of-book’’ data. Data with respect
to executed trades is referred to as ‘‘last sale’’ data.
E:\FR\FM\06JAN1.SGM
06JAN1
]]>Agencies
[Federal Register Volume 80, Number 3 (Tuesday, January 6, 2015)]
[Notices]
[Pages 553-561]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-30892]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73954; File No. SR-FINRA-2014-037]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change to FINRA Rules
0190 (Effective Date of Revocation, Cancellation, Expulsion, Suspension
or Resignation) and 2040 (Payments to Unregistered Persons) in the
Consolidated FINRA Rulebook, and Amend FINRA Rule 8311 (Effect of a
Suspension, Revocation, Cancellation, or Bar)
December 30, 2014.
I. Introduction
On September 10, 2014, Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and
Rule 19b-4 thereunder,\2\ a proposed rule change to streamline
provisions of NASD Rule 2410 (Net Prices to Persons Not in Investment
Banking or Securities Business), NASD Rule 2420 (Dealing with Non-
Members), NASD IM-2420-1 (Transactions Between Members and Non-
Members), NASD IM-2420-2 (Continuing Commissions Policy), Incorporated
NYSE Rule 353 (Rebates and Compensation), Incorporated NYSE Rule
Interpretation 345(a)(i)/01 (Compensation to Non-Registered Persons)
and Incorporated NYSE Rule Interpretation 345(a)(i)/02 (Compensation
Paid for Advisory Solicitations), which would be deleted from the
current FINRA rulebook. The proposed rule change would also adopt the
requirements of NASD Rule 1060(b) (Persons Exempt from Registration)
and Incorporated NYSE Rule Interpretation 345(a)(i)/03 (Compensation to
Non-Registered Foreign Persons Acting as Finders), as FINRA Rule
2040(c) (Nonregistered Foreign Finders) in the consolidated FINRA
rulebook without material change. In addition, the proposed rule change
would amend FINRA Rule 8311 (Effect of a Suspension, Revocation,
Cancellation, or Bar), add new Supplementary Material .01 (Remuneration
Accrued Prior to Effective Date of Sanction or Disqualification), and
adopt the requirements of NASD IM-2420-1(a) (Non-members of the
Association), as FINRA Rule 0190 (Effective Date of Revocation,
Cancellation, Expulsion, Suspension or Resignation).
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
The proposed rule change was published for comment in the Federal
Register on October 1, 2014.\3\ The Commission received seven comment
letters in response to the Notice of Filing.\4\ On November 10, 2014,
FINRA extended the time period in which the Commission must approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to approve or disapprove the proposed
rule change to December 30, 2014.\5\ On December 23,
[[Page 554]]
2014, FINRA filed a letter responding to these comments.\6\
---------------------------------------------------------------------------
\3\ Exchange Act Release No. 73210 (Sept. 25, 2014), 79 FR 59322
(Oct. 1, 2014) (Notice of Filing of a Proposed Rule Change to Adopt
FINRA Rules 0190 (Effective Date of Revocation, Cancellation,
Expulsion, Suspension or Resignation) and 2040 (Payments to
Unregistered Persons) in the Consolidated FINRA Rulebook, and Amend
FINRA Rule 8311 (Effect of a Suspension, Revocation, Cancellation,
or Bar)) (``Notice of Filing''). The comment period closed on
October 22, 2014.
\4\ William A. Jacobson, Clinical Professor of Law, Cornell Law
School, and Director, Cornell Securities Law Clinic (Oct. 17, 2014)
(``Cornell''); Peter J. Chepucavage, Esq., GC Plexus Consulting
Group (Oct. 21, 2014) (``Plexus''); William Beatty, President, North
American Securities Administrators Association and Washington
Securities Commissioner (Oct. 22, 2014) (``NASAA''); Howard Spindel,
Senior Managing Director, and Cassondra E. Joseph, Managing
Director, Integrated Management Solutions USA LLC (Oct. 22, 2014)
(``IMS''); Paul J. Tolley, Senior Vice President, Chief Compliance
Officer, Commonwealth Financial Network (Oct. 22, 2014)
(``Commonwealth''); Kevin Zambrowicz, Associate General Counsel &
Managing Director, Securities Industry and Financial Markets
Association (Oct. 22, 2014) (``SIFMA''); and Catherine T. Dixon,
Chair, Federal Regulation of Securities Committee, Business Law
Section, American Bar Association (Nov. 5, 2014) (``ABA'').
\5\ Letter from Kosha K. Dalal, Associate Vice President and
Associate General Counsel, FINRA to Katherine England, Assistant
Director, Division of Trading and Markets, Securities and Exchange
Commission, dated Nov. 10, 2014.
\6\ Letter from Kosha K. Dalal, Associate Vice President and
Associate General Counsel, FINRA to Brent J. Fields, Secretary,
Securities and Exchange Commission, dated Dec. 23, 2014 (``FINRA
Response'').
---------------------------------------------------------------------------
This order approves the proposed rule change.
II. Description of the Proposed Rule
As part of the process of developing a new consolidated rulebook
(``Consolidated FINRA Rulebook''),\7\ FINRA is proposing to adopt FINRA
Rule 2040 (Payments to Unregistered Persons) regarding the payment of
transaction-based compensation by members to unregistered persons, and
Supplementary Material .01 (Reasonable Support for Determination of
Compliance with Section 15(a) of the Exchange Act). The proposed rule
change would streamline provisions of NASD Rule 2410 (Net Prices to
Persons Not in Investment Banking or Securities Business), NASD Rule
2420 (Dealing with Non-Members), NASD IM-2420-1 (Transactions Between
Members and Non-Members), NASD IM-2420-2 (Continuing Commissions
Policy), NYSE Rule 353 (Rebates and Compensation), NYSE Rule
Interpretation 345(a)(i)/01 (Compensation to Non-Registered Persons)
and NYSE Rule Interpretation 345(a)(i)/02 (Compensation Paid for
Advisory Solicitations), which would be deleted from the current FINRA
rulebook. The proposed rule change also would adopt the requirements of
NASD Rule 1060(b) (Persons Exempt from Registration) and NYSE Rule
Interpretation 345(a)(i)/03 (Compensation to Non-Registered Foreign
Persons Acting as Finders), as FINRA Rule 2040(c) (Nonregistered
Foreign Finders) in the Consolidated FINRA Rulebook without material
change. In addition, the proposed rule change would amend FINRA Rule
8311 (Effect of a Suspension, Revocation, Cancellation, or Bar), add
new Supplementary Material .01 (Remuneration Accrued Prior to Effective
Date of Sanction or Disqualification), and adopt the requirements of
NASD IM-2420-1(a) (Non-members of the Association), as FINRA Rule 0190
(Effective Date of Revocation, Cancellation, Expulsion, Suspension or
Resignation).
---------------------------------------------------------------------------
\7\ The current FINRA rulebook consists of (1) FINRA Rules; (2)
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated
NYSE Rules''). While the NASD Rules generally apply to all FINRA
members, the Incorporated NYSE Rules apply only to those members of
FINRA that are also members of the NYSE (``Dual Members''). The
FINRA Rules apply to all FINRA members, unless such rules have a
more limited application by their terms. For more information about
the rulebook consolidation process, see Information Notice, March
12, 2008 (Rulebook Consolidation Process). For convenience, the
Incorporated NYSE Rules are referred to as the NYSE Rules.
---------------------------------------------------------------------------
A. Background
NASD Rule 1060(b) (Persons Exempt from Registration), NASD Rule
2410 (Net Prices to Persons Not in Investment Banking or Securities
Business), NASD Rule 2420 (Dealing with Non-Members), NASD IM-2420-1
(Transactions Between Members and Non-Members), and NASD IM-2420-2
(Continuing Commissions Policy) (collectively, the ``NASD Non-Member
Rules'') govern payments by members to unregistered persons. The NASD
Non-Member Rules (other than NASD Rule 1060(b)) were developed in an
era when a registered broker-dealer could engage in an over-the-counter
securities business and elect not to be a member of a registered
securities association.\8\ An original purpose of the NASD Non-Member
Rules was to encourage non-members to become members by generally
prohibiting members from providing commissions or discounts/concessions
to non-members.\9\ Since the adoption of the NASD Non-Member Rules, the
laws governing broker-dealers have changed, and today virtually all
broker-dealers doing business with the public are FINRA members.\10\
---------------------------------------------------------------------------
\8\ See Maloney Act of 1938, Pub. L. 75-719, 52 Stat. 1070,
which added Section 15A of the Exchange Act to provide for the
establishment of national securities associations with authority,
subject to SEC review, to supervise the over-the-counter securities
market and promulgate rules governing voluntary membership of
broker-dealers.
\9\ Section 15A(e)(1) of the Exchange Act states that ``[t]he
rules of a registered securities association may provide that no
member thereof shall deal with any nonmember professional (as
defined in paragraph (2) of this subsection) except at the same
prices, for the same commissions or fees, and on the same terms and
conditions as are by such member accorded to the general public.''
Section 15A(e)(2) of the Exchange Act defines ``nonmember
professional'' as ``(A) with respect to transactions in securities
other than municipal securities, any registered broker or dealer who
is not a member of a registered securities association, except such
a broker or dealer who deals exclusively in commercial paper,
bankers' acceptances, and commercial bills, and (B) with respect to
transactions in municipal securities, any municipal securities
dealer (other than a bank or division or department of a bank) who
is not a member of any registered securities association and any
municipal securities broker who is not a member of any such
association.'' The legislative reports from Congress on this
provision state that exclusion from membership would in effect be a
form of economic sanction on such non-members. See S. Rep. No. 1455
and H. R. Rep. No 2307, 75th Cong., 3rd Sess. (1938).
\10\ Section 15(b)(8) of the Exchange Act provides that ``[i]t
shall be unlawful for any registered broker or dealer to effect any
transaction in, or induce or attempt to induce the purchase or sale
of, any security (other than commercial paper, bankers' acceptances,
or commercial bills), unless such broker or dealer is a member of a
securities association registered pursuant to Section 15A of this
title or effects transactions in securities solely on a national
securities exchange of which it is a member.''
---------------------------------------------------------------------------
As a result, FINRA generally has interpreted the provisions of the
NASD Non-Member Rules, through interpretive letters and other guidance,
to prohibit the payment of commissions or fees derived from a
securities transaction to any non-member that may be acting as an
unregistered broker-dealer. Section 15(a)(1) of the Exchange Act
generally requires any broker-dealer effecting transactions in
securities to be registered with the SEC. FINRA has refrained from
providing interpretive guidance on whether a person is acting as an
unregistered broker-dealer, as the authority to interpret Section 15(a)
of the Exchange Act rests with the SEC. Registration as a broker-dealer
provides a framework of rules to regulate the conduct of persons who
receive transaction-based compensation, the receipt of which can create
potential incentives for abusive sales practices. SEC guidance states
that receipt of securities transaction-based compensation is an
indication that a person is engaged in the securities business and that
such person generally should be registered as a broker-dealer.
B. Proposed FINRA Rule 2040
FINRA is proposing to adopt new FINRA Rule 2040 (Payments to
Unregistered Persons), which eliminates the current NASD Non-Member
Rules and related NYSE Non-Member Rules (discussed further below) and
replaces them with a more straightforward rule. The proposed rule
expressly aligns with Section 15(a) of the Exchange Act and its related
guidance to determine whether registration as a broker-dealer is
required for certain persons to receive transaction-related
compensation. As further discussed in Item II.C. below, the proposed
rule change was published for comment in Regulatory Notice 09-69.\11\
FINRA received seven comment letters. A significant number of the
commenters expressed concern regarding the potential regulatory burden
of obtaining SEC no-action letters to determine whether particular
activities would require registration of persons as broker-dealers
under Section 15(a) of the Exchange Act, and the proposed deletion of
NASD Rule 1060(b) and NYSE Rule Interpretation 345(a)(i)/03 relating to
payments to foreign finders. In an effort to respond to these concerns,
FINRA is proposing to adopt Supplementary Material .01
[[Page 555]]
(Reasonable Support for Determination of Compliance with Section 15(a)
of the Exchange Act) to proposed FINRA Rule 2040 to provide guidance to
members regarding the manner in which they can reasonably support a
determination that an unregistered person is not required to be
registered under Section 15(a) of the Exchange Act by reason of
receiving payments from the member and the activities related thereto.
FINRA is also proposing to retain NASD Rule 1060(b) and NYSE Rule
Interpretation 345(a)(i)/03 relating to foreign finders as proposed
FINRA Rule 2040(c). The proposed rule sets forth the following
requirements:
---------------------------------------------------------------------------
\11\ See Regulatory Notice 09-69 (December 2009).
---------------------------------------------------------------------------
Payments to Unregistered Persons
FINRA is proposing to adopt new FINRA Rule 2040(a), which prohibits
members or associated persons from, directly or indirectly, paying any
compensation, fees, concessions, discounts, commissions or other
allowances to:
(1) Any person that is not registered as a broker-dealer under
Section 15(a) of the Exchange Act but, by reason of receipt of any such
payments and the activities related thereto, is required to be so
registered under applicable federal securities laws and Exchange Act
rules and regulations; or
(2) any appropriately registered associated person, unless such
payment complies with all applicable federal securities laws, FINRA
rules and Exchange Act rules and regulations.
The proposed change would make the rule consistent with FINRA staff
interpretations under NASD Rule 2420 and SEC rules and regulations
under Section 15(a) of the Exchange Act.\12\ Under the proposal,
persons would look to SEC rules and regulations to determine whether
the activities in question require registration as a broker-dealer
under Section 15(a) of the Exchange Act. Persons may also rely on
related published guidance issued by the SEC or its staff in the form
of releases, no-action letters or interpretations. The proposal would
align the rule with SEC staff guidance that states that receipt of
securities transaction-based compensation is an indication that a
person is engaged in the securities business and that such person
generally should be registered as a broker-dealer. The proposed change
also prohibits payments to appropriately registered associated persons
unless such payments comply with applicable federal securities laws,
FINRA rules and Exchange Act rules and regulations.
---------------------------------------------------------------------------
\12\ See FINRA Interpretative Letters issued under NASD Rule
2420: Letter to Richard Schultz, Triad Securities Corp., dated
December 28, 2007; Letter to Jonathan K. Lagemann, Esq., Law Offices
of Jonathan Kord Lagemann, dated June 27, 2001; Letter to Jay Adams
Knight, Esq., Musick, Peeler & Garrett LLP, dated March 8, 2001; and
Letter to Michael R. Miller, Esq., Kunkel Miller & Hament, dated May
31, 2000 (available at https://www.finra.org/Industry/Regulation/Guidance/InterpretiveLetters/ConductRules/index.htm).
---------------------------------------------------------------------------
FINRA is proposing to adopt Supplementary Material .01 (Reasonable
Support for Determination of Compliance with Section 15(a) of the
Exchange Act) to proposed FINRA Rule 2040 to provide guidance to
members. In applying the proposed rule, FINRA will expect members to
determine that their proposed activities would not require the
recipient of the payments to register as a broker-dealer and to
reasonably support such determination. Members that are uncertain as to
whether an unregistered person may be required to be registered under
Section 15(a) of the Exchange Act by reason of receiving payments from
the member and the activities related thereto can derive support for
their determination by, among other things, (1) reasonably relying on
previously published releases, no-action letters or interpretations
from the Commission or Commission staff that apply to their facts and
circumstances; (2) seeking a no-action letter from the Commission
staff; or (3) obtaining a legal opinion from independent, reputable
U.S. licensed counsel knowledgeable in the area. The member's
determination must be reasonable under the circumstances and should be
reviewed periodically if payments to the unregistered person are
ongoing in nature. In addition, a member must maintain books and
records that reflect the member's determination.
Retiring Representatives
FINRA is also proposing to adopt new FINRA Rule 2040(b), which
codifies existing FINRA staff guidance on the payment by members of
continuing commissions to retiring registered representatives.\13\ The
proposal permits members to pay continuing commissions to retiring
registered representatives of the member, after they cease to be
associated with the member, that are derived from accounts held for
continuing customers of the retiring registered representative
regardless of whether customer funds or securities are added to the
accounts during the period of retirement, provided that: (1) A bona
fide contract between the member and the retiring registered
representative providing for the payments was entered into in good
faith while the person was a registered representative of the member
and such contract, among other things, prohibits the retiring
registered representative from soliciting new business, opening new
accounts or servicing the accounts generating the continuing commission
payments; and (2) the arrangement complies with applicable federal
securities laws and SEA rules and regulations.
---------------------------------------------------------------------------
\13\ See FINRA Interpretative Letters issued under NASD IM-2420-
2: Letter to Name Not Public, dated November 27, 2012; Letter to Ted
A. Troutman, Esquire, Muir & Troutman, dated February 4, 2002;
Letter to Joe Tully, Commonwealth Financial Network, dated August 9,
2001; and Letter to Peter D. Koffer, Esq, Twenty-First Securities
Corporation, dated January 21, 2000 (available at https://www.finra.org/Industry/Regulation/Guidance/InterpretiveLetters/ConductRules/index.htm).
---------------------------------------------------------------------------
The proposal defines the term ``retiring registered
representative'' to mean an individual who retires from a member
(including as a result of a total disability) and leaves the securities
industry.\14\ In the case of death of the retiring registered
representative, the retiring registered representative's beneficiary
designated in the written contract or the retiring registered
representative's estate if no beneficiary is so designated may be the
beneficiary of the respective member's agreement with the deceased
representative.
---------------------------------------------------------------------------
\14\ See SEC No-Action Letter to the Securities Industry and
Financial Markets Association, 2008 SEC No-Act. LEXIS 695, November
20, 2008. The letter provides that ``[t]he retiring representative
must sever association with the Firm and with any municipal
securities dealer, government securities dealer, investment adviser
or investment company affiliates (except as may be required to
maintain any licenses or registrations required by any state) and,
is not permitted to be associated with any other broker, dealer,
municipal securities dealer, government securities dealer,
investment adviser or investment company, during the term of his or
her agreement. The retiring representative also may not be
associated with any bank, insurance company or insurance agency
(affiliated with the Firm or otherwise) during the term of his or
her agreement if the retiring representative's activities relate to
effecting transactions in securities.'' See also SEC No-Action
Letter to Amy Lee, Chief Compliance Officer, Co-CEO, Packerland
Brokerage Services, 2013 SEC No-Act. LEXIS 237, March 18, 2013.
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FINRA believes this proposal is consistent with staff guidance on
the payment of compensation to retiring representatives.\15\
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\15\ See supra note 14.
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Nonregistered Foreign Finders
In light of comments raised in response to Regulatory Notice 09-69,
FINRA is proposing to transfer NASD Rule 1060(b) (Persons Exempt from
Registration) and NYSE Rule Interpretation 345(a)(i)/03 (Compensation
to Non-Registered Foreign Persons Acting as Finders) with minor
technical changes into the Consolidated FINRA Rulebook as FINRA Rule
2040(c).\16\ As approved by the SEC in 1993 and 1995, respectively,
NYSE Rule Interpretation 345(a)(i)/03 and NASD Rule 1060(b) are largely
[[Page 556]]
identical provisions and provide that members and persons associated
with a member may pay transaction-related compensation to nonregistered
foreign finders, based upon the business of customers such persons
direct to members, subject to identified conditions. FINRA is proposing
non-substantive, technical changes to the proposed rule text to make it
easier to read. Specifically, proposed FINRA Rule 2040(c) would provide
that a member may pay to a nonregistered foreign finder (the
``finder'') transaction-related compensation based upon the business of
customers the finder directs to the member if the following conditions
are met (``foreign finders exception''):
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\16\ See supra note 11.
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(1) The member has assured itself that the finder who will receive
the compensation is not required to register in the United States as a
broker-dealer nor is subject to a disqualification as defined in
Article III, Section 4 of FINRA's By-Laws, and has further assured
itself that the compensation arrangement does not violate applicable
foreign law;
(2) The finder is a foreign national (not a U.S. citizen) or
foreign entity domiciled abroad;
(3) the customers are foreign nationals (not U.S. citizens) or
foreign entities domiciled abroad transacting business in either
foreign or U.S. securities;
(4) customers receive a descriptive document, similar to that
required by Rule 206(4)-3(b) of the Investment Advisers Act of 1940
(``Investment Advisers Act''), that discloses what compensation is
being paid to finders;
(5) customers provide written acknowledgment to the member of the
existence of the compensation arrangement and such acknowledgment is
retained and made available for inspection by FINRA;
(6) records reflecting payments to finders are maintained on the
member's books, and actual agreements between the member and the finder
are available for inspection by FINRA; and
(7) the confirmation of each transaction indicates that a referral
or finders fee is being paid pursuant to an agreement.
The rule provides that if all the conditions set forth in the rule
are satisfied, members can pay transaction-related compensation to
nonregistered foreign finders based on the business of non-U.S.
customers that finders refer to members. Specifically, the rule permits
compensation to ``be made on an ongoing basis and tied to such
variables as the level of business generated or assets under control,
notwithstanding the fact that the foreign finders' sole involvement
would be the initial referral to a member.'' \17\ The SEC Foreign
Finders Approval Order states that ``[t]he provision was intended to
give members the opportunity to enhance their competitive position in
foreign countries where new accounts are frequently opened on a
referral basis with ongoing compensation for such referral.'' \18\
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\17\ See Securities Exchange Act Release No. 32431 (June 8,
1993), 58 FR 33128 (June 15, 1993) (Order Approving File No. SR-
NYSE-92-33 Relating to an Interpretation to NYSE Rule 345
(Employees--Registration, Approval, Records)) (``SEC Approval Order
of NYSE Rule 345 Interpretation''). See also Securities Exchange Act
Release No. 35361 (February 13, 1995), 60 FR 9417 (February 17,
1995) (Order Approving File No. SR-NASD-94-51) (``SEC Foreign
Finders Approval Order'').
\18\ See supra note 13.
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Proposed FINRA Rule 2040(c) would have the same scope as the
current rule and continue to allow ongoing transaction-based payments
to nonregistered foreign finders under the limited circumstances set
forth in the current rule. As in the current rule, ``[w]hile the
foreign finders' sole involvement would be the initial referral to a
member or member organization [of non-U.S. customers to the firm],
compensation could be made on an ongoing basis and tied to such
variables as the level of business generated or assets under control.
All accounts referred by such foreign finders would be carried on the
books of the member.'' \19\ Similar to NASD Rule 1060(b), any
activities beyond the initial referral of non-U.S. customers and
payment of transaction-based compensation for any such activities would
not be within the permissible scope of the foreign finders exception as
set forth in proposed FINRA Rule 2040(c). Based solely on its
activities in compliance with proposed FINRA Rule 2040(c), the foreign
finder would not be considered an associated person of the member.
However, unless otherwise permitted by the federal securities laws or
FINRA rules, a person who receives commissions or other transaction-
based compensation in connection with securities transactions generally
has to be a registered broker-dealer or an appropriately registered
associated person of a broker-dealer who is supervised by a broker-
dealer. Members that engage foreign finders would be required to have
reasonable procedures that appropriately address the limited scope of
activities permissible under such arrangements.\20\
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\19\ See Securities Exchange Act Release No. 34941 (November 4,
1994), 59 FR 56102 (November 10, 1994) (Notice of Filing of File No.
SR-NASD-94-51). See also SEC Approval Order of NYSE Rule 345
Interpretation.
\20\ See SEC Foreign Finders Approval Order. FINRA notes that
the scope of permissible activities and associated regulatory
requirements differ between foreign finders and foreign associates,
who are registered persons of the member. See also NASD Rule 1100
(Foreign Associates).
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C. Amendments to FINRA Rule 8311
FINRA Rule 8311
FINRA is proposing amendments to FINRA Rule 8311 to eliminate
duplicative provisions in NASD IM-2420-2 and to clarify the scope of
the rule on payments by members to persons subject to suspension,
revocation, cancellation, bar (each a ``sanction'') or other
disqualification. The proposed rule provides that if a person is
subject to a sanction or other disqualification, a member may not allow
such person to be associated with it in any capacity that is
inconsistent with the sanction imposed or disqualified status,
including a clerical or ministerial capacity. The proposed rule further
provides that a member may not pay or credit to any person subject to a
sanction or disqualification, during the period of the sanction or
disqualification or any period thereafter, any salary, commission,
profit, or any other remuneration that the person might accrue, not
just earn, during the period of the sanction or disqualification.
However, a member may make payments or credits to a person subject to a
sanction that are consistent with the scope of activities permitted
under the sanction where the sanction solely limits an associated
person from conducting specified activities (such as a suspension from
acting in a principal capacity) or to a disqualified person that has
been approved (or is otherwise permitted pursuant to FINRA rules and
the federal securities laws) to associate with a member.
Specifically, the proposal clarifies that:
(1) Other disqualifications, not just suspensions, revocations,
cancellations or bars, are subject to the rule (and the rule is not
limited to orders issued by FINRA or the SEC);
(2) a member may not allow a person subject to a sanction or
disqualification to ``be'' associated with such member in any capacity
that is inconsistent with the sanction imposed or disqualified status,
including a clerical or ministerial capacity, not simply ``remain''
associated as provided in the current rule;
(3) a member may not pay any remuneration to a person subject to a
sanction or disqualification, not just payments that result directly or
indirectly from any securities transaction; and
[[Page 557]]
(4) the rule applies to any salary, commission, profit or
remuneration that the associated person might ``accrue,'' not just
``earn'' during the period of a sanction or disqualification, not just
suspension.
FINRA is also proposing to add a new paragraph to the rule that
would expressly permit a member to pay to any person subject to a
sanction or disqualification any remuneration pursuant to an insurance
or medical plan, indemnity agreement relating to legal fees, or as
required by an arbitration award or court judgment. FINRA believes that
these exceptions strike the correct balance by permitting certain key
payments.
Proposed Supplementary Material .01
In addition, FINRA is proposing to add new Supplementary Material
.01 (Remuneration Accrued Prior to Effective Date of Sanction or
Disqualification) that relates to commissions accrued by a person prior
to the effective date of a sanction or disqualification. The proposed
supplementary material would permit a member to pay a person that is
subject to a sanction or disqualification remuneration that the member
can evidence accrued to the person prior to the effective date of the
sanction or disqualification. However, a member may not pay any
remuneration that accrued to the person that relates to or results from
the activity giving rise to the sanction or disqualification, and any
such payment or credit must comply with applicable federal securities
laws. FINRA believes that adopting this new provision is necessary to
address questions by the industry on a member's ability to pay
commissions and other remuneration that was accrued by the person prior
to a sanction or disqualification going into effect. FINRA also
believes the supplementary material, together with the proposed
amendments discussed above, clarify that a member may not pay trail
commissions to a person that may accrue during the period of the
sanction or disqualification; rather, the member can only make such
payments where the member can evidence that they accrued to the person
prior to the effective date of the sanction or disqualification.
D. Adoption of New General Standard--FINRA Rule 0190
In addition, FINRA is proposing to adopt a new general standard,
proposed FINRA Rule 0190 (Effective Date of Revocation, Cancellation,
Expulsion, Suspension or Resignation), that is based largely on
provisions of NASD IM-2420-1(a) and would provide that a member will be
treated as a non-member of FINRA from the effective date of any order
or notice from FINRA or the SEC issuing a revocation, cancellation,
expulsion or suspension of its membership. In the case of suspension, a
member will be automatically reinstated to membership in FINRA at the
termination of the suspension period.
E. NASD and NYSE Rules To Be Deleted
FINRA proposes to eliminate the following NASD and NYSE Rules and
related interpretations because FINRA believes that proposed FINRA Rule
2040 simplifies and clarifies the meaning of such rules consistent with
Section 15(a) of the Exchange Act. Specifically, NASD Rule 2410, NASD
Rule 2420, NASD IM-2420-1, NASD IM-2420-2, NYSE Rule 353, NYSE Rule
Interpretation 345(a)(i)/01 and NYSE Rule Interpretation 345(a)(i)/02
will be consolidated into proposed FINRA Rule 2040, providing members
with one concise rule that outlines the applicable requirements for
payments to non-members.
NASD Rule 2410
NASD Rule 2410 (Net Prices to Persons Not in Investment Banking and
Securities Business) prohibits payments or concessions by members to
``any person not actually engaged in the investment banking or
securities business.''
NASD Rule 2420
NASD Rule 2420 (Dealing with Non-Members) generally prohibits
members from dealing with, or making payments to, non-member broker-
dealers, except at the same prices, fees or concessions offered to the
general public. NASD Rule 2420(b) specifically prohibits members from
joining any non-member broker-dealer syndicate or group in connection
with the sale of securities. NASD Rule 2420(c) provides that members
may pay concessions and fees to a non-member broker or dealer in a
foreign country who is not eligible for membership, provided the member
obtains an agreement from such foreign broker or dealer in making sales
of securities within the United States that such foreign broker or
dealer will act in accordance with the general requirements of the rule
to prohibit the payment of concessions or discounts to non-members that
are not allowed to the general public. NASD Rule 2420(d) provides
restrictions on payments by or to persons that have been suspended or
expelled.
NASD IM-2420-1
NASD IM-2420-1 (Transactions between Members and Non-Members)
provides certain exemptions from the general prohibition on
arrangements with non-members set forth in NASD Rule 2420. For example,
the rule provides exemptions for arrangements with certain non-members
relating to transactions in ``exempted securities,'' or transactions on
a national securities exchange. The rule further clarifies that a firm
that is suspended or expelled from FINRA membership, or whose
registration is revoked by the SEC, is to be considered a non-member
for purposes of the rule.
NASD IM-2420-2
NASD IM-2420-2 (Continuing Commissions Policy) allows members to
pay continuing commissions to former registered representatives after
they cease to be employed by a member, if, among other things, a bona
fide contract between the member and the registered representative
calling for the payments was entered into in good faith while the
person was a registered representative of the employing member. The
rule states that such contracts cannot permit the solicitation of new
business or the opening of new accounts by persons who are not
registered, and must conform with all applicable laws and regulations.
The rule also provides that NASD Rule 2830(c) (Investment Company
Securities, Conditions for Discounts to Dealers) should not be
interpreted to require a sales agreement for a dealer to receive
commissions on direct payments by clients or automatic dividend
reinvestments. The rule further contains a prohibition on the payment
of any kind by a member to any person who is not eligible for FINRA
membership or eligible to be associated with a member because of any
disqualification, such as revocation, expulsion or suspension that is
still in effect. The rule recognizes the validity of contracts entered
into in good faith to allow retired representatives to receive
continuing compensation on their accounts or to designate a widow or
other beneficiary; however, the rule states that members are not
required to enter into such contracts and FINRA will not specify the
terms of such contracts.
NYSE Rule 353
NYSE Rule 353 (Rebates and Compensation) prohibits a member,
principal executive, registered representative or officer from,
directly or indirectly, rebating to any person any part of the
compensation he receives from the solicitation of orders for the
purchase or sale of securities or other similar instruments for the
accounts of customers of the member, or pay such compensation, or any
part thereof, as a bonus, commission, fee or other consideration for
business sought or procured for him or for any other
[[Page 558]]
member. NYSE Rule 353(b) further provides that a member, principal
executive, registered representative or officer cannot be compensated
for business done by or through his employer after the termination of
his employment except as may be permitted by the NYSE.
NYSE Rule Interpretations 345(a)(i)/01 and/02
NYSE Rule Interpretation 345(a)(i)/01 (Compensation to Non-
Registered Persons) prohibits a member from paying to nonregistered
persons compensation based upon the business of customers they direct
to the member if such compensation is, among other things, formulated
as a direct percentage of commissions generated and is other than on an
isolated basis.
NYSE Rule Interpretation 345(a)(i)/02 (Compensation Paid for
Advisory Solicitations) provides that a member that is also registered
with the SEC as an investment adviser may enter into arrangements that
comply with Rule 206(4)-3 (Cash Payments for Client Solicitations) of
the Investment Advisers Act.
III. Description of Comments on the Proposal and FINRA's Response
As noted above, the Commission received seven comment letters in
response to the Notice of Filing.\21\ Four commenters generally
supported FINRA's efforts to consolidate and streamline rules relating
to payments to unregistered persons.\22\ Several commenters suggested
changes to the proposed rules, which are discussed further below.
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\21\ See note 4, supra.
\22\ SIFMA, NASAA, Cornell and ABA.
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A. Proposed FINRA Rule 2040(a) and the Focus on Receipt of Transaction
Based Compensation
One commenter stated that it supports proposed Rule 2040(a) but
seeks clarity on proposed Supplementary Material .01 (Reasonable
Support for Determination of Compliance with Section 15(a) of the
Exchange Act), which is discussed in detail in Section III.D.
below.\23\ One commenter expressed concern that, without a clear
regulatory framework in place, the receipt of transaction-based
compensation will lead to abusive practices.\24\ As such, the commenter
believed that registration should be required for individuals that
receive transaction-based compensation because ``such registration is
integral to the regulation of firms and individuals . . . and
exceptions to this principle should be rare, and when implemented they
should be highly prescriptive.'' \25\
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\23\ SIFMA.
\24\ NASAA.
\25\ Id.
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One commenter disagreed with FINRA's focus on the ``receipt of
transaction-based compensation'' as the main factor for determining
whether registration as a broker-dealer is required.\26\ The commenter
specifically cited recent case law pointing to other factors.\27\ The
commenter stated that FINRA should consider all of the relevant factors
before FINRA and the SEC adopt any new rule by which a firm can
determine whether a person must register in accordance with Section
15(a) of the Exchange Act.\28\ The commenter suggested that FINRA
either withdraw the proposed rule change or make substantial
modifications to it to address these concerns.\29\
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\26\ Commonwealth.
\27\ Id. (citing SEC v. Kramer, 778 F. Supp. 2nd 1320 (M.D. Fla.
2011) and SEC v. John J. Bravata, et al., Civil Action No. 09-cv-
12950 (E.D. Mich.) (Lawson, J.).
\28\ Commonwealth.
\29\ Id.
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FINRA disagrees that the proposed rule focuses only on the receipt
of transaction-based compensation as the determinative factor for who
is required to register as a broker-dealer under the Exchange Act.\30\
FINRA states that while the proposed rule change does specifically
include ``receipt of any such payments,'' as a factor, the proposed
text also expressly includes ``and the activities related thereto.''
\31\ FINRA recognizes that SEC guidance in this area provides that
certain activities may be deemed (alone or in combination) to confer
``broker'' status,\32\ and the receipt of transaction-based
compensation coupled with these activities may trigger the requirement
to register as a broker-dealer under the Exchange Act.\33\ FINRA
believes the proposed rule change is consistent with current SEC rules
and guidance.\34\
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\30\ FINRA Response at 4.
\31\ Id.
\32\ See Paul Anka, SEC No-Action Letter (available July 24,
1991). See also Muni Auction Inc., SEC No-Action Letter (available
March 13, 2000) and Bond Globe, Inc., SEC No-Action Letter
(available February 6, 2001).
\33\ FINRA Response at 4.
\34\ Id.
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B. Proposed FINRA Rule 2040(b)--Retiring Representatives
Three commenters supported FINRA's proposed creation of a concise
regulatory framework regarding the payment of continuing commissions to
retiring registered representatives by member firms and noted that the
proposed rule effectively consolidates existing guidance.\35\ In
contrast, one commenter stated that the proposal should be more
explicit on the restrictions surrounding continuing compensation that
can be paid to retired representatives.\36\ The commenter noted that
FINRA makes reference to and asserts a similarity between its current
proposal and the prior SEC no-action letter issued to SIFMA on the
topic, but NASAA believed that the staff guidance contains a more
detailed discussion of the topic.\37\ While the proposed rule does not
expressly list each condition set forth in prior SEC no-action letters,
FINRA believes that the proposed rule change incorporates the prior
guidance issued by the SEC staff by expressly requiring that any
proposed arrangement with a retiring representative must comply with
federal securities laws and Exchange Act rules and regulations.\38\
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\35\ SIFMA, ABA and IMS.
\36\ NASAA.
\37\ Id.
\38\ FINRA Response at 4.
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C. Proposed FINRA Rule 2040(c)--Non Registered Foreign Finders
1. Support for Retaining NASD Rule 1060(b)
In Regulatory Notice 09-69, FINRA had initially proposed to delete
NASD Rule 1060(b) because it believed the activity should be governed
by the general requirements of proposed FINRA Rule 2040(a). However,
based on the comments received in response to Regulatory Notice 09-69,
FINRA proposed to transfer NASD Rule 1060(b) unchanged into the
consolidated FINRA rulebook. One commenter largely supported the
proposed rule change, but seeks clarification of certain language.\39\
Three commenters expressed concern that FINRA missed the opportunity to
provide much needed clarity in the area of foreign finders and the
compensation they can be paid.\40\ One commenter expressed concern that
proposed Rule 2040(c) and Supplementary Material .01 ``create overly
broad and vaguely defined safe havens for nonregistered individuals
that receive payments related to securities transactions.'' \41\
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\39\ SIFMA.
\40\ IMS, Plexus and Commonwealth.
\41\ Cornell.
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2. Clarification That Foreign Finder Under Rule 2040(c) Is Not a
``Person Associated With a Member''
One commenter urged FINRA to clarify that a foreign finder is not a
``person associated with a member,'' as that term is defined under the
FINRA
[[Page 559]]
By-Laws.\42\ The commenter expressed concern that by relocating this
provision, which is currently contained in NASD Rule 1060(b) to new
FINRA Rule 2040, FINRA may not have fully incorporated existing
guidance and may have ``changed the character of the provision from a
registration `safe harbor' to a prescriptive rule that sets forth the
only permissible basis on which transaction-based compensation may be
paid to a foreign finder.'' \43\
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\42\ ABA.
\43\ Id.
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3. Proposed Changes to Rule Text
One commenter recommended that proposed Rule 2040(c)(1) be amended
to eliminate the use of a subjective ``assurance'' standard by revising
the language to read: ``the finder who will receive the compensation is
not required to register in the United States as a broker dealer nor is
subject to disqualification as defined in Article III, Section 4 of
FINRA's By-Laws, and the compensation arrangement does not violate
applicable foreign law.'' \44\ The commenter stated that the
``assurance'' standard is unacceptably subjective because it depends on
a specific member's knowledge, resources, and discretion and
institutional investment firms may be able to hire outside counsel to
determine whether a given transaction would violate foreign law,
whereas a smaller firm may perform its own research and (incorrectly)
conclude that the same transaction does not violate foreign law.\45\
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\44\ Cornell.
\45\ Id.
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One commenter suggested that proposed Rule 2040(c)(2) and (3)
should be amended to permit members to focus on the residency, instead
of the citizenship, of customers as this provides a ``brighter and more
enforceable line for all concerned and that the Commission has
recognized residency as a better policy guide for the proper
application of the broker-dealer registration requirements, except in
very limited circumstances.'' \46\ The commenter believed that the
requirements in the proposed rule change that finders not be U.S.
citizens and customers be foreign nationals (not U.S. citizens) impose
an undue burden.\47\
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\46\ ABA.
\47\ Id.
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One commenter stated that the conditions a firm must satisfy to
rely on proposed Rule 2040(c) (e.g., determining whether the finder is
not required to register as a U.S. broker-dealer and not subject to a
disqualification under FINRA's By-Laws, the compensation arrangement
does not violate applicable foreign law, etc.) will increase compliance
costs for firms, particularly when outside counsel has to be
retained.\48\ In addition, the commenter noted that the additional
disclosure requirements and recordkeeping requirements would be costly
for firms, especially for small firms.\49\
---------------------------------------------------------------------------
\48\ IMS.
\49\ Id.
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3. Scope of Foreign Finders Proposal Is Not Comprehensive
Two commenters expressed concern that the scope of the proposed
rule change appears to be too restrictive.\50\ Both commenters stated
that as a result of language in the Proposing Release that proposed
Rule 2040(c) permits compensation when the foreign finder's sole
involvement is the initial referral to the member, any activities
beyond the initial referral of non-U.S. customers and payment of
transaction-based compensation for any such activities ``would not be
within the permissible scope of the foreign finders exception as set
forth in proposed FINRA Rule 2040(c).'' \51\
---------------------------------------------------------------------------
\50\ SIFMA and ABA.
\51\ Id.
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One commenter stated that the Existing Nonregistered Foreign Finder
Rules include NASD Rule 1060(b) and NYSE Rule Interpretation 345(a)(i)/
03 as a safe harbor, not as an exclusive means of compliance with the
Existing Nonregistered Foreign Finder Rules, and requested that the
proposed rule language be clarified with the use of the phrase ``unless
otherwise permitted by the federal securities laws or FINRA rules,''
because there may be other permissible activities, beyond the initial
referral, that would be within the permissible scope of the foreign
finders exception.\52\ One commenter recommended that FINRA clarify the
proposed rule text to permit the payment of compensation to foreign
finders so long as the activities of the foreign finder are otherwise
permitted.\53\ The commenter also argued that the inclusion of the word
``sole'' in the Proposing Release is unnecessarily restrictive and
anti-competitive.\54\
---------------------------------------------------------------------------
\52\ SIFMA.
\53\ ABA.
\54\ Id.
---------------------------------------------------------------------------
One commenter requested additional guidance to assist in the
implementation and operation of proposed Rule 2040(c).\55\
Specifically, the commenter noted that proposed Rule 2040(c)(4)
requires that ``customers receive a descriptive document, similar to
that required by Rule 206(4)-3(b) of the Investment Advisers Act, that
discloses what compensation is being paid to finders.'' \56\ The
commenter stated that investment advisers must disclose the additional
amount that will be charged to the investment advisory fee (normally
expressed as a percent of assets under management) and the differential
attributable to the finder arrangement and, in general, the nature of
fees between an investment adviser and its clients differ from the
nature of fees between a broker-dealer and its customers.\57\
Therefore, the commenter believed that it would be useful to have
examples of how the condition would operate.\58\
---------------------------------------------------------------------------
\55\ SIFMA.
\56\ Id.
\57\ Id.
\58\ Id.
---------------------------------------------------------------------------
One commenter believed that the proposed rule would provide the SEC
with an opportunity to provide clarity in the area of finders and,
moreover, argued that allowing FINRA to adopt the SEC's standard is not
efficient.\59\ The commenter expressed concern about the certain staff
guidance, in particular the Paul Anka SEC no-action letter, which it
argued narrowed the issue to whether a transaction fee is paid.\60\ The
commenter further stated that the industry believes it is safe to pay
fixed fees to employees or finder/consultants and urged the Commission
to provide clarity on the Paul Anka letter and the transaction fee
test.\61\
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\59\ Plexus.
\60\ Id.
\61\ Id.
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4. FINRA Response
FINRA responds that it has proposed to transfer NASD Rule 1060(b)
unchanged into the consolidated rulebook in response to comments it
received on Regulatory Notice 09-69.\62\ FINRA states that the proposed
rule change does not seek to address all circumstances under which
payments may be made by U.S. broker dealers to foreign finders.\63\ In
addition, the proposed rule carries over a narrow safe harbor that
permits a firm to pay on-going compensation to a foreign finder under
the conditions set forth in the provision.\64\ FINRA recognizes that
the proposed rule change does not address all open issues with respect
to the payment of transaction-based compensation to foreign finders,
but believes that this type of comprehensive rulemaking or guidance is
outside the
[[Page 560]]
scope of this proposal.\65\ To the extent that additional interpretive
issues remain, FINRA plans to work with SEC staff on issuing related
guidance, as appropriate.\66\
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\62\ FINRA Response at 7.
\63\ Id.
\64\ Id.
\65\ Id.
\66\ Id.
---------------------------------------------------------------------------
FINRA declines to amend the proposed rule text or provide examples
as suggested by the commenters as it is not proposing to make any
substantive changes to the provision.\67\ FINRA does not intend to
change the meaning or scope of the proposed provision or its related
guidance by relocating the provision from the Series 1000 rules of the
NASD rulebook to the Series 2000 rules of the FINRA rulebook. Similar
to NASD Rule 1060(b) and NYSE Rule Interpretation 345(a)(i)/03,
proposed Rule 2040(c) is not intended to be the only means by which a
member may pay compensation to a foreign finder. FINRA states that
members may rely on other applicable federal securities laws and
regulations where the activities of a foreign finder go beyond the
scope permitted by the proposed rule (e.g., the initial referral of a
customer to the member).\68\
---------------------------------------------------------------------------
\67\ FINRA Response at 8.
\68\ Id.
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FINRA also reiterates that, as stated in the Proposing Release,
based solely on its activities in compliance with proposed FINRA Rule
2040(c), the foreign finder would not be considered an associated
person of the member.\69\ Further, FINRA believes the word ``solely''
is critical and that any activities by the foreign finder beyond the
initial referral of the customer would no longer allow a firm to rely
on the ``safe harbor'' established by the proposed rule and may require
registration under Section 15(a) of the Exchange Act or result in
association with the member under the FINRA By-Laws.\70\ Therefore,
FINRA maintains that the inclusion of this restriction is not new and
has always been understood to be part of the provision.
---------------------------------------------------------------------------
\69\ Id.
\70\ Id.
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D. Proposed FINRA Rule Supplementary Material .01 (Reasonable Support
for Determination of Compliance With Section 15(a) of the Exchange Act)
1. Requests To Clarify Scope and Terms
Four commenters had concern with the scope and requirements of
proposed Supplementary Material .01.\71\ Specifically, these commenters
expressed concern with the third prong of the proposed rule that allows
a firm to obtain a ``legal opinion'' from independent and reputable
U.S. licensed counsel.\72\ The commenters stated that seeking SEC no-
action letters or opinions of ``outside'' ``reputable'' and
``knowledgeable'' counsel will be burdensome and costly, especially for
small firms. One commenter argued that, among other burdens, the
proposal would mean that in-house counsel is automatically disqualified
from rendering such an opinion, even if that counsel is prepared and
qualified, by reputation and knowledge, to issue an objective
opinion.\73\ One commenter urged FINRA to provide greater flexibility
in the range of measures that a member firm may rely on to ``reasonably
support'' its determination and suggested that proposed Rule 2040(a)(3)
be amended to provide that a member firm support its determination
based on ``advice of knowledgeable outside counsel'' and make clear
that the enumerated bases for determining that the necessary
``reasonable support'' exists are not exclusive.\74\
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\71\ See ABA, SIFMA, IMS and Cornell.
\72\ Id.
\73\ IMS.
\74\ ABA.
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One commenter stated that determining whether counsel is
``reputable'' or ``knowledgeable in the area'' depends on the market in
which he or she practices and the member's discretion and requested
clarification as to whether ``area'' refers to geography or legal
practice.\75\ One commenter stated that the concepts of ``reputable''
and ``knowledgeable'' are subjective and the costs of implementing
``these mandates are likely prohibitive and disproportionate to any
economic benefit the firm might receive.'' \76\ One commenter requested
further guidance to illustrate the standard ``reasonable under the
circumstances'' as well as guidance on the expected frequency of the
periodic review.\77\
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\75\ Cornell.
\76\ IMS.
\77\ SIFMA.
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2. Other Comments
Three commenters believed that FINRA should provide greater clarity
on when and under what circumstances payments to unregistered foreign
finders are permitted.\78\ One commenter objected to the proposed rule
arguing that, instead of providing clarity, FINRA has imposed five
additional conditions by proposing Supplementary Material .01.\79\ The
commenter further argued that FINRA did not address the impact of the
proposed rule change on several activities that may be exempt from
broker-dealer registration through SEC or FINRA guidance.\80\
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\78\ IMS, Commonwealth, and Plexus.
\79\ IMS.
\80\ Id.
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One commenter asserted that the addition of this Supplementary
Material .01 mitigates some of the concerns previously raised by them
in response to Regulatory Notice 09-69, but they remain concerned with
the complex issues surrounding the compensation of unregistered persons
that they stated is largely unaddressed by the current proposal.\81\
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\81\ NASAA.
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One commenter stated that the ``reasonable reliance'' standard in
Supplementary Material .01 depends almost entirely on the judgment of
broker-dealers that have a financial incentive to interpret materials
broadly.\82\ Further, the commenter stated that although the
Supplementary Material is intended to mitigate the burden of
determining whether Section 15(a) requires registration, the
uncertainty of a ``reasonable reliance'' standard invites a much
costlier alternative: private dispute resolution, administrative
hearings, or litigation.\83\
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\82\ Cornell.
\83\ Id.
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3. FINRA's Response
FINRA states that it is proposing to adopt Supplementary Material
.01 because it recognizes the potential costs and burdens of obtaining
a firm-specific, no-action letter from the SEC.\84\ The proposed
supplementary material is intended to clarify that firms may rely on
other means to demonstrate compliance and provides firms with the
flexibility to rely on other options that may be less costly and time
consuming.\85\
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\84\ FINRA Response at 9.
\85\ FINRA Response at 9-10.
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FINRA does not intend proposed Supplementary Material .01 to be an
exhaustive list by which firms can make a reasonable determination.\86\
FINRA states that a legal opinion from independent, reputable U.S.
licensed counsel knowledgeable in the area is not the only means
available to firms. FINRA notes that firms may continue to rely on the
advice of in-house counsel or foreign counsel under prong 1 that
permits a firm to make a determination by ``reasonably relying on
previously published releases, no-action letters or interpretations
from the Commission or Commission staff that apply to its facts and
circumstances.'' \87\
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\86\ FINRA Response at 10.
\87\ Id.
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FINRA declines to define how frequently a firm must review its
determination under the proposed rule
[[Page 561]]
because the review must be reasonable based on the nature and scope of
the activity in question and therefore requires a factual review. FINRA
believes, however, that an annual review for on-going payments
generally would be reasonable, absent evidence of activities by the
recipient of the payments that raise red flags.\88\
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\88\ Id.
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IV. Discussion and Commission Findings
The Commission has carefully considered the proposal, the comments
received, and FINRA's responses to the comments. Based on its review of
the record, the Commission finds that the proposal is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to a national securities association.\89\
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\89\ In approving the proposal, as amended, the Commission has
considered the impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
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In particular, the Commission finds that the proposed rule change
is consistent with the provisions of Section 15A(b)(6) of the Act,
which requires, among other things, that FINRA's rules be designed to
prevent fraudulent and manipulative acts and practices; promote just
and equitable principles of trade; and, in general, protect investors
and the public interest.\90\
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\90\ 15 U.S.C. 78o-3(b)(6).
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The proposed rule change will clarify and streamline several NASD
and NYSE rules relating to payments to unregistered persons for
adoption as FINRA Rules in the new Consolidated FINRA Rulebook.
Specifically, proposed FINRA Rule 2040(a) aligns with Section 15(a) of
the Exchange Act and its related guidance to determine whether
registration as a broker-dealer is required for certain persons to
receive transaction-related compensation; proposed FINRA Rule 2040(b)
codifies existing FINRA guidance on the payment by members of
continuing commissions to retiring registered representatives
consistent with the Commission's guidance in this area; and proposed
FINRA Rule 2040(c) adopts the foreign finders provisions of NASD Rule
1060(b) and NYSE Rule Interpretation 345(a)(i)/03 with technical
changes. The amendments to FINRA Rule 8311 eliminate duplicate
provisions in NASD IM-2420-2 and clarify the scope of the rule on
payments by members to persons subject to sanctions. Commenters'
suggestions that the SEC (or FINRA) provide additional guidance on
``finders'' are outside the scope of this rule filing, and thus outside
the scope of this order.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\91\ that the proposed rule change (SR-FINRA-2014-037) be, and
hereby is, approved.
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\91\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\92\
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\92\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2014-30892 Filed 1-5-15; 8:45 am]
BILLING CODE 8011-01-P
