Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change To Adopt FINRA Rule 2272 To Govern Sales or Offers of Sales of Securities on the Premises of Any Military Installation to Members of the U.S. Armed Forces or Their Dependents, 48376-48379 [2015-19763]

Download as PDF 48376 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices Register on July 8, 2015.3 The Commission has received no comment letters regarding the proposed rule change. Section 19(b)(2) of the Act 4 provides that, within 45 days of the publication of the notice of the filing of a proposed rule change, or within such longer period up to 90 days as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding, or as to which the self-regulatory organization consents, the Commission shall either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved. The Commission is extending this 45-day time period. The Commission finds that it is appropriate to designate a longer period within which to take action on the proposed rule change so that it has sufficient time to consider the proposed rule change. Accordingly, the Commission, pursuant to Section 19(b)(2) of the Act,5 designates October 6, 2015 as the date by which the Commission should either approve or disapprove or institute proceedings to determine whether to disapprove the proposed rule change (File Number SR– CHX–2015–03). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.6 Robert W. Errett, Deputy Secretary. [FR Doc. 2015–19760 Filed 8–11–15; 8:45 am] SECURITIES AND EXCHANGE COMMISSION [Release No. 34–75633; File No. SR–FINRA– 2015–009] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change To Adopt FINRA Rule 2272 To Govern Sales or Offers of Sales of Securities on the Premises of Any Military Installation to Members of the U.S. Armed Forces or Their Dependents August 6, 2015. I. Introduction On April 23, 2015, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to adopt FINRA Rule 2272. Rule 2272 would govern sales or offers of sales of securities on the premises of any military installation to members of the U.S. Armed Forces or their dependents. The proposed rule was published for comment in the Federal Register on May 6, 2015.3 The Commission received four comment letters in response to the proposal.4 On June 18, 2015, FINRA granted the Commission an extension of time, until August 10, 2015, to act on the proposal.5 FINRA responded to the comment letters on July 21, 2015.6 This order approves the rule as proposed. BILLING CODE 8011–01–P 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Notice of Filing of a Proposed Rule to Adopt FINRA Rule 2272 to Govern Sales or Offers of Sales of Securities on the Premises of Any Military Installation to Members of the U.S. Armed Forces or Their Dependents; Exchange Act Release No. 74890 (May 6, 2015), 80 FR 27220 (May 12, 2015) (‘‘Notice’’). 4 See Letters from Jason T. Robinson, Georgia State University College of Law Investor Advocacy Clinic, dated May 30, 2015 (‘‘GSU Letter’’); Hugh D. Berkson, Public Investors Arbitration Bar Association, dated June 1, 2015 (‘‘PIABA Letter’’); David T. Bellaire, Esq., Financial Services Institute, dated June 2, 2015 (‘‘FSI Letter’’); David M. Rader, Michigan State University College of Law Investor Advocacy Legal Clinic, dated June 9, 2015 (‘‘MSU Letter’’). 5 See Letter from Jeanette Wingler, Assistant General Counsel, FINRA, to Katherine England, Assistant Director, Division of Trading and Markets, Securities and Exchange Commission, dated June 18, 2015. 6 See Letter from Jeanette Wingler, Assistant General Counsel, FINRA, to Brent J. Fields, Secretary, Securities and Exchange Commission, dated July 21, 2015 (‘‘FINRA Response Letter’’). mstockstill on DSK4VPTVN1PROD with NOTICES 2 17 3 See Securities Exchange Act Release No. 75346 (July 1, 2015), 80 FR 39172 (‘‘Notice’’). 4 15 U.S.C. 78s(b)(2). 5 Id. 6 17 CFR 200.30–3(a)(31). VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 II. Description of the Proposed Rule a. Background As stated in the Notice, FINRA is proposing to adopt Rule 2272 to govern sales or offers of sales of securities on the premises of any military installation to members of the U.S. Armed Forces or their dependents.7 Proposed Rule 2272 would impose a number of restrictions upon FINRA members engaged in the sales or offers of sales of securities, including a disclosure requirement, a suitability obligation, and a ban on referral fees to persons not associated with a FINRA member.8 i. Statutory Basis To comply with the requirements of Section 15A(b)(14) of the Exchange Act,9 FINRA proposed rules governing the sales, or offers of sales, of securities on the premises of any military installation to members of the U.S. Armed Forces or their dependents.10 Section 15A(b)(14) requires these rules mandate: (1) A broker-dealer performing brokerage services to military personnel or dependents disclose (a) that securities offered are not being offered or provided on behalf of the federal government, and that their offer is not sanctioned, recommended, or encouraged by the federal government and (b) the identity of the registered broker-dealer offering the securities; (2) such broker-dealer to perform an appropriate suitability determination prior to making a recommendation of a security to a member of the U.S. Armed Forces or a dependent thereof; and (3) that no person receive referral fees or incentive compensation unless such person is an associated person of a registered broker-dealer and qualified pursuant to the rules of a self-regulatory organization.11 ii. Proposed Rule Proposed FINRA Rule 2272 requires that, prior to engaging in sales or offers of sales of securities on the premises of a military installation to any member of the U.S. Armed Forces or a dependent thereof, a FINRA member must clearly and conspicuously disclose in writing: (1) The identity of the member offering 7 See Notice at 27221. id. 9 15 U.S.C. 78o–3(b)(14). 10 Congress amended Section 15A(b) of the Exchange Act in the Military Personnel Financial Services Protection Act (‘‘Military Act’’). Pub. L. 109–290, 120 Stat. 1317. The Military Act requires the rules of a registered national securities association to include provisions governing the sales, or offers of sales, of securities on the premises of any military installation to any member of the Armed Forces or a dependent thereof. 11 15 U.S.C. 78o–3(b)(14). 8 See E:\FR\FM\12AUN1.SGM 12AUN1 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices the securities; and (2) that the securities offered are not being offered or provided by the member on behalf of the federal government, and that the offer of such securities is not sanctioned, recommended, or encouraged by the federal government.12 The proposed rule also mandates that a FINRA member satisfy the suitability obligations imposed by FINRA Rule 2111 when making a recommendation on the premises of a military installation to any member of the U.S. Armed Forces or a dependent thereof.13 Finally, the proposed rule requires that no FINRA member cause a person to receive a referral fee or incentive compensation in connection with sales or offers of sales of securities on the premises of a military installation with any member of the U.S. Armed Forces or a dependent thereof, unless such person is an associated person of a registered broker-dealer who is appropriately qualified consistent with FINRA rules, and the payment complies with applicable federal securities laws and FINRA rules.14 both off and on military installations, and that expanding the proposed rule to cover sales in both locations would enhance compliance with FINRA rules.20 In its response, FINRA acknowledged that some of the concerns the rule is designed to address would also be raised by off-base sales.21 However, FINRA stated that it drafted the rule to comply with the statutory requirements of the Exchange Act, which only apply in relevant part to offers and sales of securities on the premises of a military installation, rather than in any location.22 FINRA also noted that the potential of investor confusion regarding the involvement of the federal government in offering the securities may be reduced for activities occurring off the premises of a military installation.23 In addition, FINRA noted that any such sales or offers of sales of securities off the premises of a military installation must comply with applicable FINRA rules and that any misleading representation would be otherwise prohibited by FINRA rules.24 III. Summary of Comments and FINRA’s Response As noted above, the Commission received four comment letters on the proposed rule change.15 As discussed in more detail below, one commenter supported the rule in its entirety and stated that it was thorough and balanced.16 Three commentators also supported the proposed rule, but also suggested some modifications.17 The sections below outline the suggestions and specific concerns raised by the commenters, as well as FINRA’s response. b. Additional Disclosures One commenter proposed the creation of a standardized disclosure form covering each element of Rule 2272, and requiring broker-dealers to offer a written attestation that proposed investments are suitable for the prospective investor.25 The commenter stated that such a form would promote clear disclosure and draw attention to the protections available under the proposed rule.26 That commenter expressed concern that without such a form, broker-dealers could otherwise conceal the disclosures required by the proposal.27 FINRA responded that a standard disclosure form would be unnecessary because FINRA allows a risk-based approach to documenting compliance with Rule 2111.28 FINRA responded also that the rule explicitly requires member firms to make disclosures ‘‘clearly and conspicuously’’ and ‘‘in writing’’ prior to engaging in sales or a. Application to Off-Base Offers and Sales of Securities Two commenters suggested extending the scope of the proposed rule to cover offers and sales of securities to members of the U.S. Armed Forces and their dependents both off and on the premises of a military installation.18 One of these commenters stated that suitability challenges to service members exist irrespective of where the service member and his/her family live.19 The other commenter stated that perpetrators of financial fraud operate mstockstill on DSK4VPTVN1PROD with NOTICES 12 See proposed Rule 2722(b). proposed Rule 2722(c). 14 See proposed Rule 2722(d). 15 See note 4, supra. 16 See FSI Letter (stating that ‘‘FSI fully supports the Proposed Rule, and [FSI] applaud[s] FINRA’s efforts’’). 17 See GSU Letter, MSU Letter, and PIABA Letter. 18 See GSU Letter, and PIABA Letter. 19 See PIABA Letter. 13 See VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 GSU Letter. FINRA Response Letter at 3. 22 See id. 23 See id. 24 See id. 25 See GSU Letter. 26 See id. (noting that such a form would ‘‘lend credibility to the spirit of Rule 2272 and draw attention to the disclosures, simplifying the process for all parties involved’’). 27 See id. (stating that such a form would ‘‘limit broker-dealers’ ability to hide these disclosures amongst the numerous other documents that potential investors are given to review before a transaction’’). 28 See FINRA Response Letter at 3. 48377 offers of sales, and believes that these requirements reduce the potential for investor confusion.29 Another commenter stated that the disclosure obligations should be expanded to require that persons associated with any broker-dealer disclose, both verbally and in writing: (1) If they served in the U.S. Armed Forces and the status of their discharge; (2) that any former military service does not relate to their financial advice offered; and (3) that a service member should not feel compelled to invest because of that associated person’s former military service.30 In response to the commenter, FINRA noted that—as the commenter had observed 31—the military inculcates a culture of deference to veterans, and that some veterans with prestigious careers or assignments may hold undue influence over current members of the Armed Forces.32 FINRA stated that requiring disclosure of military service for persons associated with a member firm could have the unintentional effect of unduly influencing or pressuring current service members’ investment decisions.33 c. Suitability One commenter proposed to expand the suitability requirements of the proposed rule to include militaryspecific factors for broker-dealers to consider when making sales or offers of sales of securities to military personnel, or alternatively that FINRA provide guidance to broker-dealers regarding the application of the proposed rule.34 The commenter suggests specifically including a service member’s anticipated time remaining at their current duty station, as well as the time a service member has remaining on their contract as criteria a broker-dealer should consider, and believes that this will protect service members from incurring unsustainable financial commitments.35 Another commenter proposed that FINRA members should be trained to understand issues relating 20 See 21 See PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 29 See id. at 3–4. MSU Letter (noting that ‘‘[f]ormer military personnel . . . hold a certain amount of influence over young service members that respect military tradition’’ and that ‘‘it is critical that persons serving military communities accurately disclose their history of service as well as discharge status’’). 31 See MSU Letter. 32 See FINRA Response Letter at 4. 33 See id. 34 See MSU Letter. 35 See id. (stating that ‘‘[s]ervice members experience substantial income variability’’ due to duty station changes which have different housing allowances and cost of living adjustments). 30 See E:\FR\FM\12AUN1.SGM 12AUN1 48378 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices to assets in government Thrift Savings Plan accounts.36 In response to both commenters, FINRA noted that recommendations concerning retirement accounts, including Thrift Savings Plan accounts, are subject to FINRA Rule 2111, requiring a member firm and its registered representatives to consider the customer’s investment profile, including their financial situation, risk tolerance, and other concerns.37 FINRA stated that suitability obligations imposed by Rule 2111 satisfy the commenters’ concerns and the statutory requirement that FINRA adopt rules requiring its members to perform an appropriate suitability determination.38 FINRA also noted that it has previously recommend that member firms train their representatives on retirement savings options and the tax, investment, and other consequences of those decisions.39 d. Education mstockstill on DSK4VPTVN1PROD with NOTICES One commenter encouraged FINRA to focus on financial education for members of the U.S. Armed Forces, and suggested that FINRA produce programs to reach service members and their dependents.40 This commenter also stated that registered representatives should be trained concerning the special suitability needs of service members.41 FINRA replied that it supported financial education for members of the U.S. Armed Forces, and that the FINRA Investor Education Foundation’s Military Financial Readiness Program offers such financial education tools and training to the relevant population.42 FINRA also responded that it has recommended that member firms train registered representatives concerning retirement savings options.43 36 See PIABA Letter (noting that the ‘‘sale of investment services to military service members and their families provide unique suitability problems,’’ the primary issue of which ‘‘stems from recommendations that service members purchase products with increased fees when they move their savings out of their government savings plan’’). 37 See FINRA Response Letter at 4–5. 38 See id. at 5. 39 See id. 40 See PIABA Letter (noting that ‘‘service members typically receive very little financial training and have spent years not worrying about income and financial needs’’). 41 See id. 42 See FINRA Response Letter at 5 (stating that ‘‘the FINRA Investor Education Foundation’s Military Financial Readiness Program has delivered free, unbiased financial education tools and training to service members, their spouses and on-base financial educators through a variety of programs and public awareness initiatives’’). 43 See id. at 5 (citing FINRA Regulatory Notice 13–45 from December 2013). VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 IV. Discussion After carefully considering the proposed rule, the comments submitted, and FINRA’s response to the comments, the Commission is approving the rule change as proposed. Based on its review of the record, the Commission finds that FINRA Rule 2272 as proposed is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities association.44 The Commission also finds that the proposed rule sufficiently addresses the concerns raised by commenters. As discussed above, Rule 2272 would govern sales or offers of sales of securities on the premises of any military installation to members of the U.S. Armed Forces or their dependents. The proposed rule would require broker-dealers to disclose their identity and that the securities are neither offered nor approved by the federal government, as well as to comply with FINRA suitability obligations. The rule would also ban referral fees unless paid to an associated person of a FINRA member and the payment complies with applicable federal securities laws and FINRA rules. The Commission takes note of the strong commenter support for both the specific provisions and broad aim of the underlying rule: Protecting members of the U.S. Armed Forces from dishonest and unscrupulous practices.45 The Commission acknowledges also the need, as one commenter expressed, for efficient regulations that keep investors, particularly American servicemen and women and their dependents, wellprotected and effectively informed.46 The Commission believes that Rule 2272 as proposed provides appropriate protections as called for by Congress, consistent with the Act for members of the U.S. Armed Forces and their dependents. The Commission acknowledges the suggestion by two commenters to expand the scope of Rule 2272 to cover sales off as well as on military installations.47 The Commission notes in particular the concern of one commenter, that military members are particularly susceptible to affinity fraud and that perpetrators of financial fraud may operate both on and off military 44 In approving this proposed rule change, the Commission has considered the proposed rule change’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 45 See FSI Letter, GSU Letter, MSU Letter, and PIABA Letter. 46 See FSI Letter. 47 See GSU Letter, and PIABA Letter. PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 installations.48 Nonetheless, the Commission agrees with FINRA that the statutory requirements of the Exchange Act apply to offers and sales of securities on the premises of a military installation to members of the U.S. Armed Forces and their dependents,49 and believes that current FINRA rules are designed to address many of the potential harms commenters have highlighted. The Commission notes that the registration requirements for brokerdealers under the Exchange Act and current FINRA rules restrict the payment of referral fees to unregistered persons.50 The Commission also concurs with FINRA’s assessment that sales or an offer of sales of securities offbase implicates a lesser risk of confusion as to whether those securities are endorsed or otherwise offered by the federal government.51 The Commission also acknowledges the concerns raised by some commenters that Rule 2272 should incorporate a requirement for a standardized disclosure form.52 In response, FINRA declined to propose such a requirement, pointing to its riskbased approach to documenting compliance with Rule 2111.53 The Commission notes that the proposed rule explicitly requires that disclosures be made both ‘‘in writing’’ and ‘‘clearly and conspicuously’’ before engaging in any sales or offers of sales, which should reduce the likelihood of investor confusion.54 The Commission also notes that neither the Exchange Act nor the proposed rule impose specific requirements about the form that disclosure should take, and believes that this flexible requirement will be more likely to allow broker-dealers to make the sort of disclosures best suited to individual investors. The Commission also notes the concern raised by a commenter that military veterans associated with member firms could assert undue 48 See GSU Letter. See also FINRA Response Letter at 3 (acknowledging ‘‘offers and sales of securities off the premises of a military installation may present some of the same issues as with offers and sales of securities on the premises of a military installation’’). 49 See FINRA Response Letter at 3. 50 See id. (noting that ‘‘any such sales or offers of sales of securities off the premises of a military installation must comply with applicable FINRA rules, including suitability and referral fee requirements’’). 51 See id. 52 See e.g. GSU Letter. 53 See FINRA Response Letter at 3, note 11 (citing Regulatory Notice 12–25 which states that Rule 2111 does not include explicit documentation requirements, but does require a firm to show compliance). 54 See id. at 3. E:\FR\FM\12AUN1.SGM 12AUN1 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices influence upon service members.55 FINRA, however, notes that requiring a registered representative to disclose his or her service history and discharge status could unduly influence or pressure current service members’ investment decisions.56 The Commission agrees that requiring disclosure of a FINRA member’s military service could have the counterproductive effect of causing that member to gain the sort of influence which such a requirement would seek to avoid. Finally, while the Commission appreciates the concerns raised by one commenter suggesting that additional suitability criteria be considered, including those related to the government’s Thrift Savings Plan,57 the Commission agrees with FINRA that the suitability obligations imposed by Rule 2111 satisfy the commenters’ concerns.58 Thus, the Commission believes that such concerns are already addressed by the rule as proposed. In light of the statutory requirements under Section 15A(b)(14) of the Exchange Act,59 and the need to protect members of the U.S. Armed Forces from unscrupulous practices regarding the sales of investment products, the Commission believes that the proposed rule is consistent with the Act in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest.60 V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,61 that the proposed rule change (SR–FINRA– 2015–009), be, and hereby is, approved. 55 See MSU Letter. FINRA Response Letter at 4. 57 See PIABA Letter. Both FINRA and the Commission’s Office of Compliance Inspections and Examinations (‘‘OCIE’’) have recently identified sales practices relating to retirement accounts and rollovers as examination priorities. See FINRA 2015 Regulatory and Examination Priorities Letter, January 6, 2015, available at http://www.finra.org/ sites/default/files/p602239.pdf (discussing Individual Retirement Account (IRA) Rollovers (and Other ‘‘Wealth Events’’)). See also National Exam Program Examination Priorities for 2015, available at http://www.sec.gov/about/offices/ocie/nationalexamination-program-priorities-2015.pdf (‘‘[OCIE] will assess whether registrants are using improper or misleading practices when recommending the movement of retirement assets from employersponsored defined contribution plans into other investments and accounts, especially when they pose greater risks and/or charge higher fees’’). 58 See FINRA Response Letter at 4. 59 15 U.S.C. 78o–3(b)(14). 60 See 15 U.S.C. 78o–3(b)(6). 61 15 U.S.C. 78s(b)(2). mstockstill on DSK4VPTVN1PROD with NOTICES 56 See VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.62 Robert W. Errett, Deputy Secretary. [FR Doc. 2015–19763 Filed 8–11–15; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–75629; File No. SR–FINRA– 2015–019] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change To Amend FINRA Rules Regarding Temporary and Permanent Cease and Desist Orders August 6, 2015. I. Introduction On June 16, 2015, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) a proposal to amend FINRA Rule Series 9100, 9200, 9300, 9550, and 9800 regarding temporary cease and desist orders (TCDO) and permanent cease and desist orders (PCDO). The proposed rule change was published for comment in the Federal Register on July 7, 2015.3 The Commission received one comment on the proposal, which supported the proposal.4 This order approves the proposed rule change. II. Description of the Proposed Rule Change 5 The Code of Procedure (Rule Series 9000) governs FINRA’s disciplinary process, and includes: Rule 9120, Definitions, Rule Series 9200, Disciplinary Proceedings, Rule Series 9300, Review of Disciplinary Proceeding by National Adjudicatory Council and FINRA Board; Application for SEC Review, Rule Series 9500, Other Proceedings, and Rule Series 9800, Temporary Cease and Desist Orders. FINRA’s temporary cease and desist 62 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 75333 (June 30, 2015), 80 FR 38783 (July 7, 2015) (‘‘Notice’’). 4 See Letter from Joseph C. Peiffer, President, Public Investors Arbitration Bar Association, to Brent J. Fields, Secretary, Commission dated July 28, 2015 (‘‘PIABA Letter’’). 5 The Notice contains a more detailed description of the proposal. See Notice, supra note 3. 1 15 PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 48379 authority, introduced on a pilot basis in 2003 6 and approved permanently in 2009,7 can be used only in connection with the violation of specified rules,8 and requires that a Hearing Panel find by a preponderance of the evidence that the alleged violation has occurred in order to impose a TCDO.9 FINRA proposed to amend Rule Series 9800 to, among other things, lower the evidentiary standard for finding a violation to ‘‘a showing of likelihood of success on the merits.’’ FINRA also proposed to amend Rule Series 9100, 9200, 9300, and 9550 to adopt a new expedited proceeding for failure to comply with a TCDO or PCDO, to harmonize the provisions governing how documents are served in temporary cease and desist proceedings and related expedited proceedings, to clarify the process for issuing PCDOs, to ease FINRA’s administrative burden in temporary cease and desist proceedings, particularly with respect to appointment of a Hearing Officer and Hearing Panel, and to make conforming changes throughout the Code of Procedure. A. TCDO Evidentiary Standard Rule 9840(a)(1) provides that a TCDO shall be imposed if the Hearing Panel finds ‘‘by a preponderance of the evidence that the alleged violation specified in the notice has occurred.’’ FINRA believes this is too high an evidentiary threshold to obtain a TCDO, which FINRA considers a critical investor protection tool. FINRA notes that the evidentiary standard to get a TCDO is the same one needed to find a violation in the concurrent underlying disciplinary proceeding. FINRA states that it creates an administrative challenge to have to make the same evidentiary presentation in the temporary cease and desist proceeding as in the subsequent underlying disciplinary proceeding, but on an expedited basis. Therefore, FINRA has proposed to lower the evidentiary 6 See Securities Exchange Act Release No. 47925 (May 23, 2003), 68 FR 33548 (June 4, 2003) (Order Approving File No. SR–NASD–98–80). 7 See Securities Exchange Act Release No. 60306 (July 14, 2009), 74 FR 36292 (July 22, 2009) (Order Approving File No. SR–FINRA–2009–035). 8 Rule 9810(a) provides that a temporary cease and desist proceeding may be initiated with respect to alleged violations of Section 10(b) of the Act (15 U.S.C. 78j(b)) and Rule 10b–5 under the Act (17 CFR 240.10b–5); Rules 15g–1 through 15g–9 under the Act (17 CFR 240.15g–1 et seq.); FINRA Rule 2010 (if the alleged violation is unauthorized trading, or misuse or conversion of customer assets, or based on violations of Section 17(a) of the Securities Act of 1933 (15 U.S.C. 77q(a))); FINRA Rule 2020; or Rule 4330 (if the alleged violation is misuse or conversion of customer assets). 9 Rule 9840(a)(1). E:\FR\FM\12AUN1.SGM 12AUN1

Agencies

[Federal Register Volume 80, Number 155 (Wednesday, August 12, 2015)]
[Notices]
[Pages 48376-48379]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-19763]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75633; File No. SR-FINRA-2015-009]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Adopt FINRA 
Rule 2272 To Govern Sales or Offers of Sales of Securities on the 
Premises of Any Military Installation to Members of the U.S. Armed 
Forces or Their Dependents

August 6, 2015.

I. Introduction

    On April 23, 2015, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt FINRA Rule 2272. Rule 
2272 would govern sales or offers of sales of securities on the 
premises of any military installation to members of the U.S. Armed 
Forces or their dependents. The proposed rule was published for comment 
in the Federal Register on May 6, 2015.\3\ The Commission received four 
comment letters in response to the proposal.\4\ On June 18, 2015, FINRA 
granted the Commission an extension of time, until August 10, 2015, to 
act on the proposal.\5\ FINRA responded to the comment letters on July 
21, 2015.\6\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing of a Proposed Rule to Adopt FINRA Rule 
2272 to Govern Sales or Offers of Sales of Securities on the 
Premises of Any Military Installation to Members of the U.S. Armed 
Forces or Their Dependents; Exchange Act Release No. 74890 (May 6, 
2015), 80 FR 27220 (May 12, 2015) (``Notice'').
    \4\ See Letters from Jason T. Robinson, Georgia State University 
College of Law Investor Advocacy Clinic, dated May 30, 2015 (``GSU 
Letter''); Hugh D. Berkson, Public Investors Arbitration Bar 
Association, dated June 1, 2015 (``PIABA Letter''); David T. 
Bellaire, Esq., Financial Services Institute, dated June 2, 2015 
(``FSI Letter''); David M. Rader, Michigan State University College 
of Law Investor Advocacy Legal Clinic, dated June 9, 2015 (``MSU 
Letter'').
    \5\ See Letter from Jeanette Wingler, Assistant General Counsel, 
FINRA, to Katherine England, Assistant Director, Division of Trading 
and Markets, Securities and Exchange Commission, dated June 18, 
2015.
    \6\ See Letter from Jeanette Wingler, Assistant General Counsel, 
FINRA, to Brent J. Fields, Secretary, Securities and Exchange 
Commission, dated July 21, 2015 (``FINRA Response Letter'').
---------------------------------------------------------------------------

    This order approves the rule as proposed.

II. Description of the Proposed Rule

a. Background

    As stated in the Notice, FINRA is proposing to adopt Rule 2272 to 
govern sales or offers of sales of securities on the premises of any 
military installation to members of the U.S. Armed Forces or their 
dependents.\7\ Proposed Rule 2272 would impose a number of restrictions 
upon FINRA members engaged in the sales or offers of sales of 
securities, including a disclosure requirement, a suitability 
obligation, and a ban on referral fees to persons not associated with a 
FINRA member.\8\
---------------------------------------------------------------------------

    \7\ See Notice at 27221.
    \8\ See id.
---------------------------------------------------------------------------

i. Statutory Basis
    To comply with the requirements of Section 15A(b)(14) of the 
Exchange Act,\9\ FINRA proposed rules governing the sales, or offers of 
sales, of securities on the premises of any military installation to 
members of the U.S. Armed Forces or their dependents.\10\ Section 
15A(b)(14) requires these rules mandate: (1) A broker-dealer performing 
brokerage services to military personnel or dependents disclose (a) 
that securities offered are not being offered or provided on behalf of 
the federal government, and that their offer is not sanctioned, 
recommended, or encouraged by the federal government and (b) the 
identity of the registered broker-dealer offering the securities; (2) 
such broker-dealer to perform an appropriate suitability determination 
prior to making a recommendation of a security to a member of the U.S. 
Armed Forces or a dependent thereof; and (3) that no person receive 
referral fees or incentive compensation unless such person is an 
associated person of a registered broker-dealer and qualified pursuant 
to the rules of a self-regulatory organization.\11\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78o-3(b)(14).
    \10\ Congress amended Section 15A(b) of the Exchange Act in the 
Military Personnel Financial Services Protection Act (``Military 
Act''). Pub. L. 109-290, 120 Stat. 1317. The Military Act requires 
the rules of a registered national securities association to include 
provisions governing the sales, or offers of sales, of securities on 
the premises of any military installation to any member of the Armed 
Forces or a dependent thereof.
    \11\ 15 U.S.C. 78o-3(b)(14).
---------------------------------------------------------------------------

ii. Proposed Rule
    Proposed FINRA Rule 2272 requires that, prior to engaging in sales 
or offers of sales of securities on the premises of a military 
installation to any member of the U.S. Armed Forces or a dependent 
thereof, a FINRA member must clearly and conspicuously disclose in 
writing: (1) The identity of the member offering

[[Page 48377]]

the securities; and (2) that the securities offered are not being 
offered or provided by the member on behalf of the federal government, 
and that the offer of such securities is not sanctioned, recommended, 
or encouraged by the federal government.\12\
---------------------------------------------------------------------------

    \12\ See proposed Rule 2722(b).
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    The proposed rule also mandates that a FINRA member satisfy the 
suitability obligations imposed by FINRA Rule 2111 when making a 
recommendation on the premises of a military installation to any member 
of the U.S. Armed Forces or a dependent thereof.\13\
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    \13\ See proposed Rule 2722(c).
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    Finally, the proposed rule requires that no FINRA member cause a 
person to receive a referral fee or incentive compensation in 
connection with sales or offers of sales of securities on the premises 
of a military installation with any member of the U.S. Armed Forces or 
a dependent thereof, unless such person is an associated person of a 
registered broker-dealer who is appropriately qualified consistent with 
FINRA rules, and the payment complies with applicable federal 
securities laws and FINRA rules.\14\
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    \14\ See proposed Rule 2722(d).
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III. Summary of Comments and FINRA's Response

    As noted above, the Commission received four comment letters on the 
proposed rule change.\15\ As discussed in more detail below, one 
commenter supported the rule in its entirety and stated that it was 
thorough and balanced.\16\ Three commentators also supported the 
proposed rule, but also suggested some modifications.\17\ The sections 
below outline the suggestions and specific concerns raised by the 
commenters, as well as FINRA's response.
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    \15\ See note 4, supra.
    \16\ See FSI Letter (stating that ``FSI fully supports the 
Proposed Rule, and [FSI] applaud[s] FINRA's efforts'').
    \17\ See GSU Letter, MSU Letter, and PIABA Letter.
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a. Application to Off-Base Offers and Sales of Securities

    Two commenters suggested extending the scope of the proposed rule 
to cover offers and sales of securities to members of the U.S. Armed 
Forces and their dependents both off and on the premises of a military 
installation.\18\ One of these commenters stated that suitability 
challenges to service members exist irrespective of where the service 
member and his/her family live.\19\ The other commenter stated that 
perpetrators of financial fraud operate both off and on military 
installations, and that expanding the proposed rule to cover sales in 
both locations would enhance compliance with FINRA rules.\20\
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    \18\ See GSU Letter, and PIABA Letter.
    \19\ See PIABA Letter.
    \20\ See GSU Letter.
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    In its response, FINRA acknowledged that some of the concerns the 
rule is designed to address would also be raised by off-base sales.\21\ 
However, FINRA stated that it drafted the rule to comply with the 
statutory requirements of the Exchange Act, which only apply in 
relevant part to offers and sales of securities on the premises of a 
military installation, rather than in any location.\22\ FINRA also 
noted that the potential of investor confusion regarding the 
involvement of the federal government in offering the securities may be 
reduced for activities occurring off the premises of a military 
installation.\23\ In addition, FINRA noted that any such sales or 
offers of sales of securities off the premises of a military 
installation must comply with applicable FINRA rules and that any 
misleading representation would be otherwise prohibited by FINRA 
rules.\24\
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    \21\ See FINRA Response Letter at 3.
    \22\ See id.
    \23\ See id.
    \24\ See id.
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b. Additional Disclosures

    One commenter proposed the creation of a standardized disclosure 
form covering each element of Rule 2272, and requiring broker-dealers 
to offer a written attestation that proposed investments are suitable 
for the prospective investor.\25\ The commenter stated that such a form 
would promote clear disclosure and draw attention to the protections 
available under the proposed rule.\26\ That commenter expressed concern 
that without such a form, broker-dealers could otherwise conceal the 
disclosures required by the proposal.\27\
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    \25\ See GSU Letter.
    \26\ See id. (noting that such a form would ``lend credibility 
to the spirit of Rule 2272 and draw attention to the disclosures, 
simplifying the process for all parties involved'').
    \27\ See id. (stating that such a form would ``limit broker-
dealers' ability to hide these disclosures amongst the numerous 
other documents that potential investors are given to review before 
a transaction'').
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    FINRA responded that a standard disclosure form would be 
unnecessary because FINRA allows a risk-based approach to documenting 
compliance with Rule 2111.\28\ FINRA responded also that the rule 
explicitly requires member firms to make disclosures ``clearly and 
conspicuously'' and ``in writing'' prior to engaging in sales or offers 
of sales, and believes that these requirements reduce the potential for 
investor confusion.\29\
---------------------------------------------------------------------------

    \28\ See FINRA Response Letter at 3.
    \29\ See id. at 3-4.
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    Another commenter stated that the disclosure obligations should be 
expanded to require that persons associated with any broker-dealer 
disclose, both verbally and in writing: (1) If they served in the U.S. 
Armed Forces and the status of their discharge; (2) that any former 
military service does not relate to their financial advice offered; and 
(3) that a service member should not feel compelled to invest because 
of that associated person's former military service.\30\
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    \30\ See MSU Letter (noting that ``[f]ormer military personnel . 
. . hold a certain amount of influence over young service members 
that respect military tradition'' and that ``it is critical that 
persons serving military communities accurately disclose their 
history of service as well as discharge status'').
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    In response to the commenter, FINRA noted that--as the commenter 
had observed \31\--the military inculcates a culture of deference to 
veterans, and that some veterans with prestigious careers or 
assignments may hold undue influence over current members of the Armed 
Forces.\32\ FINRA stated that requiring disclosure of military service 
for persons associated with a member firm could have the unintentional 
effect of unduly influencing or pressuring current service members' 
investment decisions.\33\
---------------------------------------------------------------------------

    \31\ See MSU Letter.
    \32\ See FINRA Response Letter at 4.
    \33\ See id.
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c. Suitability

    One commenter proposed to expand the suitability requirements of 
the proposed rule to include military-specific factors for broker-
dealers to consider when making sales or offers of sales of securities 
to military personnel, or alternatively that FINRA provide guidance to 
broker-dealers regarding the application of the proposed rule.\34\ The 
commenter suggests specifically including a service member's 
anticipated time remaining at their current duty station, as well as 
the time a service member has remaining on their contract as criteria a 
broker-dealer should consider, and believes that this will protect 
service members from incurring unsustainable financial commitments.\35\ 
Another commenter proposed that FINRA members should be trained to 
understand issues relating

[[Page 48378]]

to assets in government Thrift Savings Plan accounts.\36\
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    \34\ See MSU Letter.
    \35\ See id. (stating that ``[s]ervice members experience 
substantial income variability'' due to duty station changes which 
have different housing allowances and cost of living adjustments).
    \36\ See PIABA Letter (noting that the ``sale of investment 
services to military service members and their families provide 
unique suitability problems,'' the primary issue of which ``stems 
from recommendations that service members purchase products with 
increased fees when they move their savings out of their government 
savings plan'').
---------------------------------------------------------------------------

    In response to both commenters, FINRA noted that recommendations 
concerning retirement accounts, including Thrift Savings Plan accounts, 
are subject to FINRA Rule 2111, requiring a member firm and its 
registered representatives to consider the customer's investment 
profile, including their financial situation, risk tolerance, and other 
concerns.\37\ FINRA stated that suitability obligations imposed by Rule 
2111 satisfy the commenters' concerns and the statutory requirement 
that FINRA adopt rules requiring its members to perform an appropriate 
suitability determination.\38\ FINRA also noted that it has previously 
recommend that member firms train their representatives on retirement 
savings options and the tax, investment, and other consequences of 
those decisions.\39\
---------------------------------------------------------------------------

    \37\ See FINRA Response Letter at 4-5.
    \38\ See id. at 5.
    \39\ See id.
---------------------------------------------------------------------------

d. Education

    One commenter encouraged FINRA to focus on financial education for 
members of the U.S. Armed Forces, and suggested that FINRA produce 
programs to reach service members and their dependents.\40\ This 
commenter also stated that registered representatives should be trained 
concerning the special suitability needs of service members.\41\ FINRA 
replied that it supported financial education for members of the U.S. 
Armed Forces, and that the FINRA Investor Education Foundation's 
Military Financial Readiness Program offers such financial education 
tools and training to the relevant population.\42\ FINRA also responded 
that it has recommended that member firms train registered 
representatives concerning retirement savings options.\43\
---------------------------------------------------------------------------

    \40\ See PIABA Letter (noting that ``service members typically 
receive very little financial training and have spent years not 
worrying about income and financial needs'').
    \41\ See id.
    \42\ See FINRA Response Letter at 5 (stating that ``the FINRA 
Investor Education Foundation's Military Financial Readiness Program 
has delivered free, unbiased financial education tools and training 
to service members, their spouses and on-base financial educators 
through a variety of programs and public awareness initiatives'').
    \43\ See id. at 5 (citing FINRA Regulatory Notice 13-45 from 
December 2013).
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IV. Discussion

    After carefully considering the proposed rule, the comments 
submitted, and FINRA's response to the comments, the Commission is 
approving the rule change as proposed. Based on its review of the 
record, the Commission finds that FINRA Rule 2272 as proposed is 
consistent with the requirements of the Exchange Act and the rules and 
regulations thereunder applicable to a national securities 
association.\44\ The Commission also finds that the proposed rule 
sufficiently addresses the concerns raised by commenters.
---------------------------------------------------------------------------

    \44\ In approving this proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    As discussed above, Rule 2272 would govern sales or offers of sales 
of securities on the premises of any military installation to members 
of the U.S. Armed Forces or their dependents. The proposed rule would 
require broker-dealers to disclose their identity and that the 
securities are neither offered nor approved by the federal government, 
as well as to comply with FINRA suitability obligations. The rule would 
also ban referral fees unless paid to an associated person of a FINRA 
member and the payment complies with applicable federal securities laws 
and FINRA rules.
    The Commission takes note of the strong commenter support for both 
the specific provisions and broad aim of the underlying rule: 
Protecting members of the U.S. Armed Forces from dishonest and 
unscrupulous practices.\45\ The Commission acknowledges also the need, 
as one commenter expressed, for efficient regulations that keep 
investors, particularly American servicemen and women and their 
dependents, well-protected and effectively informed.\46\ The Commission 
believes that Rule 2272 as proposed provides appropriate protections as 
called for by Congress, consistent with the Act for members of the U.S. 
Armed Forces and their dependents.
---------------------------------------------------------------------------

    \45\ See FSI Letter, GSU Letter, MSU Letter, and PIABA Letter.
    \46\ See FSI Letter.
---------------------------------------------------------------------------

    The Commission acknowledges the suggestion by two commenters to 
expand the scope of Rule 2272 to cover sales off as well as on military 
installations.\47\ The Commission notes in particular the concern of 
one commenter, that military members are particularly susceptible to 
affinity fraud and that perpetrators of financial fraud may operate 
both on and off military installations.\48\ Nonetheless, the Commission 
agrees with FINRA that the statutory requirements of the Exchange Act 
apply to offers and sales of securities on the premises of a military 
installation to members of the U.S. Armed Forces and their 
dependents,\49\ and believes that current FINRA rules are designed to 
address many of the potential harms commenters have highlighted. The 
Commission notes that the registration requirements for broker-dealers 
under the Exchange Act and current FINRA rules restrict the payment of 
referral fees to unregistered persons.\50\ The Commission also concurs 
with FINRA's assessment that sales or an offer of sales of securities 
off-base implicates a lesser risk of confusion as to whether those 
securities are endorsed or otherwise offered by the federal 
government.\51\
---------------------------------------------------------------------------

    \47\ See GSU Letter, and PIABA Letter.
    \48\ See GSU Letter. See also FINRA Response Letter at 3 
(acknowledging ``offers and sales of securities off the premises of 
a military installation may present some of the same issues as with 
offers and sales of securities on the premises of a military 
installation'').
    \49\ See FINRA Response Letter at 3.
    \50\ See id. (noting that ``any such sales or offers of sales of 
securities off the premises of a military installation must comply 
with applicable FINRA rules, including suitability and referral fee 
requirements'').
    \51\ See id.
---------------------------------------------------------------------------

    The Commission also acknowledges the concerns raised by some 
commenters that Rule 2272 should incorporate a requirement for a 
standardized disclosure form.\52\ In response, FINRA declined to 
propose such a requirement, pointing to its risk-based approach to 
documenting compliance with Rule 2111.\53\ The Commission notes that 
the proposed rule explicitly requires that disclosures be made both 
``in writing'' and ``clearly and conspicuously'' before engaging in any 
sales or offers of sales, which should reduce the likelihood of 
investor confusion.\54\ The Commission also notes that neither the 
Exchange Act nor the proposed rule impose specific requirements about 
the form that disclosure should take, and believes that this flexible 
requirement will be more likely to allow broker-dealers to make the 
sort of disclosures best suited to individual investors.
---------------------------------------------------------------------------

    \52\ See e.g. GSU Letter.
    \53\ See FINRA Response Letter at 3, note 11 (citing Regulatory 
Notice 12-25 which states that Rule 2111 does not include explicit 
documentation requirements, but does require a firm to show 
compliance).
    \54\ See id. at 3.
---------------------------------------------------------------------------

    The Commission also notes the concern raised by a commenter that 
military veterans associated with member firms could assert undue

[[Page 48379]]

influence upon service members.\55\ FINRA, however, notes that 
requiring a registered representative to disclose his or her service 
history and discharge status could unduly influence or pressure current 
service members' investment decisions.\56\ The Commission agrees that 
requiring disclosure of a FINRA member's military service could have 
the counter-productive effect of causing that member to gain the sort 
of influence which such a requirement would seek to avoid.
---------------------------------------------------------------------------

    \55\ See MSU Letter.
    \56\ See FINRA Response Letter at 4.
---------------------------------------------------------------------------

    Finally, while the Commission appreciates the concerns raised by 
one commenter suggesting that additional suitability criteria be 
considered, including those related to the government's Thrift Savings 
Plan,\57\ the Commission agrees with FINRA that the suitability 
obligations imposed by Rule 2111 satisfy the commenters' concerns.\58\ 
Thus, the Commission believes that such concerns are already addressed 
by the rule as proposed.
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    \57\ See PIABA Letter. Both FINRA and the Commission's Office of 
Compliance Inspections and Examinations (``OCIE'') have recently 
identified sales practices relating to retirement accounts and 
rollovers as examination priorities. See FINRA 2015 Regulatory and 
Examination Priorities Letter, January 6, 2015, available at http://www.finra.org/sites/default/files/p602239.pdf (discussing Individual 
Retirement Account (IRA) Rollovers (and Other ``Wealth Events'')). 
See also National Exam Program Examination Priorities for 2015, 
available at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2015.pdf (``[OCIE] will assess 
whether registrants are using improper or misleading practices when 
recommending the movement of retirement assets from employer-
sponsored defined contribution plans into other investments and 
accounts, especially when they pose greater risks and/or charge 
higher fees'').
    \58\ See FINRA Response Letter at 4.
---------------------------------------------------------------------------

    In light of the statutory requirements under Section 15A(b)(14) of 
the Exchange Act,\59\ and the need to protect members of the U.S. Armed 
Forces from unscrupulous practices regarding the sales of investment 
products, the Commission believes that the proposed rule is consistent 
with the Act in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest.\60\
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78o-3(b)(14).
    \60\ See 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\61\ that the proposed rule change (SR-FINRA-2015-009), be, and 
hereby is, approved.
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    \61\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\62\
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    \62\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-19763 Filed 8-11-15; 8:45 am]
 BILLING CODE 8011-01-P