Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend FINRA Rule 0150 (Application of Rules to Exempted Securities Except Municipal Securities), 62137-62147 [2022-22174]
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Federal Register / Vol. 87, No. 197 / Thursday, October 13, 2022 / Notices
pricing power in the execution of option
order flow. Moreover, the Commission
has repeatedly expressed its preference
for competition over regulatory
intervention in determining prices,
products, and services in the securities
markets. Specifically, in Regulation
NMS, the Commission highlighted the
importance of market forces in
determining prices and SRO revenues
and, also, recognized that current
regulation of the market system ‘‘has
been remarkably successful in
promoting market competition in its
broader forms that are most important to
investors and listed companies.’’ 37 The
fact that this market is competitive has
also long been recognized by the courts.
In NetCoalition v. Securities and
Exchange Commission, the D.C. Circuit
stated as follows: ‘‘[n]o one disputes
that competition for order flow is
‘fierce.’ . . . As the SEC explained, ‘[i]n
the U.S. national market system, buyers
and sellers of securities, and the brokerdealers that act as their order-routing
agents, have a wide range of choices of
where to route orders for execution’;
[and] ‘no exchange can afford to take its
market share percentages for granted’
because ‘no exchange possesses a
monopoly, regulatory or otherwise, in
the execution of order flow from broker
dealers’. . . .’’.38 Accordingly, the
Exchange does not believe its proposed
changes to the incentive programs
impose any burden on competition that
is not necessary or appropriate in
furtherance of the purposes of the Act.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 39 of the Act and
subparagraph (f)(2) of Rule 19b–4 40
thereunder, because it establishes a due,
fee, or other charge imposed by the
Exchange.
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
37 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37499 (June 29, 2005).
38 NetCoalition v. SEC, 615 F.3d 525, 539 (D.C.
Cir. 2010) (quoting Securities Exchange Act Release
No. 59039 (December 2, 2008), 73 FR 74770, 74782–
83 (December 9, 2008) (SR–NYSEArca–2006–21)).
39 15 U.S.C. 78s(b)(3)(A).
40 17 CFR 240.19b–4(f)(2).
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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
under Section 19(b)(2)(B) 41 of the Act to
determine whether the proposed rule
change 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:
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–
CBOE–2022–049 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2022–049. 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 website (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 website 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 the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
41 15
PO 00000
U.S.C. 78s(b)(2)(B).
Frm 00072
Fmt 4703
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62137
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2022–049, and
should be submitted on or before
November 3, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.42
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2022–22180 Filed 10–12–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–95990; File No. SR–FINRA–
2022–028]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend FINRA Rule
0150 (Application of Rules to
Exempted Securities Except Municipal
Securities)
October 6, 2022.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 29, 2022, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by FINRA. FINRA has
designated the proposed rule change as
constituting a ‘‘non-controversial’’ rule
change under paragraph (f)(6) of Rule
19b–4 under the Act,3 which renders
the proposal effective upon receipt of
this filing by the Commission. 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
FINRA is proposing to amend
paragraph (c) of FINRA Rule 0150
(Application of Rules to Exempted
Securities Except Municipal Securities)
to clarify the application of specified
42 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 17 CFR 240.19b–4(f)(6).
1 15
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Federal Register / Vol. 87, No. 197 / Thursday, October 13, 2022 / Notices
FINRA rules to transactions in, and
business activities relating to, exempted
securities, including government
securities (other than municipal
securities).4 The proposed rule change
would also amend Capital Acquisition
Broker (‘‘CAB’’) Rule 015 (Application
of Rules to Municipal Securities) to
more closely track the text of FINRA
Rule 0150, and for consistency with the
revisions to FINRA Rule 0150 made
pursuant to this rule filing.
Below is the text of the proposed rule
change. Proposed new language is
underlined; proposed deletions are in
brackets.5
*
*
*
*
0100. General Standards
*
*
*
*
*
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0150. Application of Rules to Exempted
Securities Except Municipal Securities
(a) through (b) No Change.
(c) Unless otherwise indicated within
a particular Rule, the following rules are
applicable to transactions in, and
business activities relating to, exempted
securities, except municipal securities,
conducted by members and associated
persons: Rules 0110, 0120, 0130, 0140,
0160, 0170, 0190, 1010, 1011, IM–1011–
1, IM–1011–2, IM–1011–3, 1012, 1013,
IM–1013–1, IM–1013–2, 1014, 1015,
1016, 1017, 1019, 1020, 1021, 1122,
1200 Series (other than Rules 1220(a)(5),
(a)(6), (a)(7), (b)(4), (b)(5) and (b)(6)),
2010, 2020, 2030, 2040, 2060, 2070,
2080, 2081, 2090, 2111, 2122, 2130,
2140, 2150, 2165, 2210, 2211, 2212,
2213, 2214, 2216, 2220, 2231, 2232,
2261, 2263, 2264, 2266, 2267, 2268,
2269, 2270, 2272, 2273, 2320(g), 2360,
[3110] 3100 Series, 3200 Series, [3210,
3220, 3260, 3270, 3280,] 3300 Series,
4100 Series, [4120, 4130,] 4210, 4220,
4 For purposes of the proposed rule change, the
terms ‘‘exempted securities,’’ ‘‘government
securities’’ and ‘‘municipal securities’’ shall have
the meanings as specified in Exchange Act Sections
3(a)(12), 3(a)(42) and 3(a)(29), respectively. 15
U.S.C. 78c(a)(12), (a)(42) and (a)(29).
5 FINRA notes that some of the rules listed in
FINRA Rule 0150(c) include provisions that are not
applicable to government securities in whole or in
part. For instance, notwithstanding the presence of
FINRA Rule 2232 in FINRA Rule 0150(c), FINRA
Rule 2232(b) is inapplicable by its terms to
government securities that are not also equity
securities. In addition, FINRA Rules 2232(c)
through (f) are not applicable to U.S. Treasury
securities. See Securities Exchange Act Release No.
79346 (November 17, 2016), 81 FR 84659, 84661
(November 23, 2016) (Order Approving File No.
SR–FINRA–2016–032). FINRA also notes that some
of the rules listed in FINRA Rule 0150(c) are
applicable to exempted securities other than
government securities. For example, FINRA Rule
2320(g) (Member Compensation) is applicable to
group variable contracts that are exempted
securities.
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Capital Acquisition Broker Rules
010. General Standards
*
*
*
*
*
015. Application of Rules to Exempted
Securities Except Municipal Securities
FINRA Rules
*
4230, 4310 Series, [4311,] 4330, 4340,
4360, 4370, 4380, 4510 Series, 4520
Series, 4530, 4540, 4570, 4580, 4590,
5160, 5210, 5220, 5230, 5310, 5340,
6700 Series, 7730, 8100 Series, [8110,
8120,] 8210, 8211, 8300 Series, [8310,
8311, 8312, 8320, 8330] 9000 Series
[and 9552], 12000 Series, 13000 Series,
and 14000 Series.
*
*
*
*
*
Jkt 259001
[FINRA Rule 0150 shall apply to the
Capital Acquisition Broker Rules.]
(a) For purposes of this Rule, the
terms ‘‘exempted securities’’ and
‘‘municipal securities’’ shall have the
meanings specified in Sections 3(a)(12)
and 3(a)(29) of the Exchange Act,
respectively.
(b) The Capital Acquisition Broker
Rules are not intended to be, and shall
not be construed as, rules concerning
transactions in municipal securities.
(c) Unless otherwise indicated within
a particular Rule, all Capital
Acquisition Broker Rules are applicable
to transactions in, and business
activities related to, exempted
securities, except municipal securities,
conducted by capital acquisition
brokers and their associated persons,
other than Capital Acquisition Broker
Rules 512 and 515.
(d) Nothing in this Rule shall be
deemed to expand or otherwise alter the
scope of activities permitted for capital
acquisition brokers under Capital
Acquisition Broker Rule 016(c).
*
*
*
*
*
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA 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. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Background
Prior to 1986, broker-dealers engaged
solely in a government securities
business were not required to register
with the SEC and become members of
a registered securities exchange or a
registered securities association, such as
FINRA (then NASD).6 Moreover, the
Exchange Act expressly prohibited
FINRA from adopting and enforcing
compliance with its rules in connection
with transactions by its members in
exempted securities, including
government securities.7
The Government Securities Act of
1986 (‘‘GSA’’),8 however, amended the
Exchange Act to require broker-dealers
that engaged exclusively in transactions
in government securities to register with
the SEC and become members of a
registered securities exchange or a
registered securities association if they
effected transactions in, or induced or
attempted to induce the purchase or sale
of, any government securities.9 The GSA
also amended the Exchange Act to
authorize a registered securities
association, such as FINRA, to adopt
and implement rules for specified
limited purposes to govern transactions
by its members in exempted securities
(other than municipal securities).10 The
6 On July 30, 2007, NASD and NYSE consolidated
their member regulation, enforcement and dispute
resolution operations into a combined organization,
FINRA. See Securities Exchange Act Release No.
56145 (July 26, 2007), 72 FR 42169 (August 1,
2007), as amended by Securities Exchange Act
Release No. 56145A (May 30, 2008), 73 FR 32377
(June 6, 2008) (Order Approving File No. SR–
NASD–2007–023). For consistency purposes, when
discussing FINRA or the predecessor NASD, this
filing will refer solely to FINRA.
7 Specifically, Section 15A(f) of the Exchange Act
provided that ‘‘[n]othing in this section shall be
construed to apply with respect to any transaction
by a broker or dealer in any exempted security.’’
See 15 U.S.C. 78o–3 (historical notes).
8 Public Law 99–571, 100 Stat. 3208 (1986).
9 See supra note 8. (amending the Exchange Act
to add Section 15C(a)(1)(A) to require the
registration of a government securities broker or
dealer).
10 The GSA, among other things, amended
Section 15A(f) to add paragraph (2), which
provided that a registered securities association
could adopt and implement rules with respect to
exempted securities to (A) enforce compliance with
applicable provisions of the Exchange Act; (B)
provide for appropriate discipline of members for
violations of applicable provisions of the Exchange
Act; (C) provide for reasonable inspection and
examination of members’ books and records; (D)
deny or condition the membership of a brokerdealer that does not meet standards for financial
responsibility or conduct under the Exchange Act;
(E) bar any person from being associated with a
member if such person has engaged in prohibited
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GSA did not authorize FINRA to apply
its rules, including its sales practice
rules (which were then part of the Rules
of Fair Practice), that were outside of
those specified areas to transactions in
exempted securities.11 In 1988, FINRA
amended its existing rules and adopted
new rules to carry out its
responsibilities under the GSA.12
In 1993, Congress enacted the
Government Securities Act
Amendments of 1993 (‘‘GSAA’’), which
removed all previous limitations on the
ability of FINRA to apply its rules,
including its sales practice rules, to
transactions by members in exempted
securities, other than municipal
securities.13 Subsequently, in 1996,
with oversight by the SEC and the SEC’s
consultation with the Department of the
Treasury, FINRA specified provisions of
its Rules of Fair Practice that would be
applicable to exempted securities, other
than municipal securities.14
conduct or refused to provide requested
information; and (F) prohibit fraudulent,
misleading, deceptive and false advertising. See 100
Stat. 3208, 3218.
11 In contrast, the GSA did not prevent registered
securities exchanges, such as the NYSE, from
applying their rules to government securities
transactions. See United States Government
Accountability Office, U.S. Government Securities:
More Transaction Information and Investor
Protection Measures Are Needed, September 1990
at 47 (noting that although the GSA did not
authorize FINRA to apply its sales practice rules to
government securities transactions, the GSA did not
prevent registered securities exchanges, such as the
NYSE, from applying their rules to government
securities transactions), available at https://
www.gao.gov/assets/ggd-90-114.pdf.
12 Specifically, FINRA amended its By-Laws to
address government securities transactions by
members and the eligibility of sole government
securities broker-dealers to become members.
FINRA also amended Schedule C to the NASD ByLaws, which contained rules relating to
membership and registration, to provide for the
registration of government securities principals and
government securities representatives. In addition,
FINRA adopted a subset of rules designated as
‘‘Government Securities Rules,’’ which addressed
books and records, supervisory procedures and the
regulation of members experiencing financial or
operational difficulties or changing their exemptive
status under SEA Rule 15c3–3. The Government
Securities Rules also included provisions regarding
communications with the public and FINRA’s
ability to bring disciplinary actions for violations
involving government securities transactions. See
Securities Exchange Act Release No. 26240
(November 2, 1988), 53 FR 45412 (November 9,
1988) (Order Approving File No. SR–NASD–88–12).
The terms ‘‘sole government securities brokerdealers,’’ ‘‘government securities broker-dealers,’’
‘‘registered government securities brokers and
dealers’’ and ‘‘government securities broker or
dealer’’ as used in this proposed rule change refer
to brokers and dealers that engage exclusively in
transactions in government securities and that are
registered under Section 15C of the Exchange Act.
13 Government Securities Act Amendments of
1993, Public Law 103–202, 1(a), 107 Stat. 2344
(1993).
14 See Securities Exchange Act Release No. 37588
(August 20, 1996), 61 FR 44100 (August 27, 1996)
(Order Approving File No. SR–NASD–95–39)
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In 2001, for ease of reference, FINRA
adopted NASD Rule 0116 (now FINRA
Rule 0150), which was intended to
codify, with some additions,15 the rules
that were approved by the Commission
as applicable to transactions in, and
business activities relating to,
government securities, and more
broadly exempted securities (other than
municipal securities), and that were
expressly listed in the 1996 Approval
Order.16 FINRA has amended Rule 0150
since its original adoption, but it has not
updated the rule routinely.17
More recently, on August 19, 2016,
the SEC’s Division of Trading and
Markets requested that FINRA
undertake a comprehensive review of its
rulebook to identify existing FINRA
rules that exclude or may otherwise not
apply to U.S. Treasury securities (or
government securities more generally),
or for which the applicability of the rule
to U.S. Treasury securities requires
clarification, and to assess the
continuing validity for such
exclusions.18 In response, FINRA
undertook a review of its rulebook for
this purpose.19 FINRA also reviewed its
(‘‘1996 Approval Order’’). While not expressly
listed as rules applicable to exempted securities in
the 1996 Approval Order, the 1996 Approval Order
noted that the general provisions of Articles I and
II of the Rules of Fair Practice relating to the
adoption, application and definitions of rules,
which were formerly in the Government Securities
Rules, also applied to government securities. In
addition, the 1996 Approval Order stated that
Schedule C to the By-Laws would apply to the
personnel of sole government securities brokerdealers, including persons selling options on
government securities.
15 NASD Rule 0116 codified a FINRA staff
interpretation that the non-cash compensation
provisions of NASD Rule 2820(g) (now FINRA Rule
2320(g)) apply to group variable contracts that are
exempted securities.
16 See Securities Exchange Act Release No. 44631
(July 31, 2001), 66 FR 41283 (August 7, 2001)
(Order Approving File No. SR–NASD–00–38).
17 For example, in 2015, FINRA amended Rule
0150 to expressly apply FINRA Rule 2121 (Fair
Prices and Commissions) to transactions in
exempted securities that are government securities.
See Securities Exchange Act Release No. 76639
(December 14, 2015), 80 FR 79112 (December 18,
2015) (Order Approving File No. SR–FINRA–2015–
033). In addition, FINRA has replaced references to
NASD rules when those rules were transferred into
the FINRA rulebook as consolidated FINRA rules.
See, e.g., Securities Exchange Act Release No.
78851 (September 15, 2016), 81 FR 64969
(September 21, 2016) (Notice of Filing and
Immediate Effectiveness of File No. SR–FINRA–
2016–036) (replacing NASD IM–2210–2 with
FINRA Rule 2211).
18 See Letter from Stephen Luparello, Director,
Division of Trading and Markets, SEC, to Robert W.
Cook, President and Chief Executive Officer,
FINRA, dated August 19, 2016, available at https://
www.sec.gov/divisions/marketreg/letter-to-finraregulation-of-us-treasury-securities.pdf.
19 The current FINRA rulebook consists of (1)
FINRA rules; and (2) the Temporary Dual FINRANYSE Member Rule Series (formerly Incorporated
NYSE Rules and Incorporated NYSE Rule
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62139
rulebook to identify the rules that are
applicable to government securities, and
those rules whose applicability to
government securities requires
clarification. On October 17, 2016,
FINRA submitted a letter in response to
the Commission’s request.20
Rules To Be Added to FINRA Rule 0150
As an initial step in responding to the
SEC staff’s request, the proposed rule
change would amend FINRA Rule
0150(c) to add to its list of rules those
that are currently applicable to
exempted securities, including
government securities, but which are
not currently listed in that rule. The
rules that FINRA is proposing to add are
rules that have general application to
the activities of all FINRA members,
irrespective of business model or client
base. In addition, the proposed rule
change would modernize and make
current the list of rules in Rule 0150. It
is not intended to substantively change
the current application or requirements
of FINRA rules to exempted securities.
As stated in Rule 0150, the application
of any listed rules, or specific provisions
of those rules, to exempted securities,
including government securities, is
governed by the language of the rule
itself.21
Interpretations). While the FINRA rules generally
apply to all FINRA members, the Temporary Dual
FINRA-NYSE Member Rule Series apply solely to
those members of FINRA that are also members of
NYSE on or after July 30, 2007. As previously
mentioned, the Temporary Dual FINRA-NYSE
Member Rule Series historically were not subject to
the same limitations with respect to their
applicability to government securities as FINRA
rules. See supra note 11. Accordingly, FINRA
believes that the Temporary Dual FINRA-NYSE
Member Rule Series currently apply to exempted
securities, including government securities, unless
otherwise indicated by a particular rule.
20 See Letter from Robert W. Cook, President and
Chief Executive Officer, FINRA, to Stephen
Luparello, Director, Division of Trading and
Markets, SEC, dated October 17, 2016, available at
https://www.sec.gov/divisions/marketreg/letterfrom-finra-regulation-of-us-treasury-securities.pdf.
21 For example, FINRA Rule 7730(b), by its terms,
currently excludes transactions in U.S. Treasury
Securities, as defined under FINRA rules, from the
TRACE transaction reporting fees. See Securities
Exchange Act Release No. 79116, (October 18,
2016), 81 FR 73167, 73169 (October 24, 2016)
(Order Approving File No. SR–FINRA-2016–027).
While the proposed rule change would amend Rule
0150 to include Rule 7730, Rule 7730(b) would
continue by its terms to exclude transactions in U.S.
Treasury Securities, as defined under FINRA rules.
Further, in updating FINRA Rule 0150, FINRA is
not suggesting that every type of exempted security
is subject to each rule listed in paragraph (c). It
could be the case that a listed rule applies, by its
terms, to a subcategory of exempted securities based
on the characteristics of that security. For example,
FINRA understands that U.S. Treasury securities do
not have callable features. However, governmentsponsored enterprises (‘‘GSEs’’), whose securities
are considered by statute to be exempted securities,
may issue callable securities.
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General Standards Rules
The proposed rule change would
amend FINRA Rule 0150(c) to expressly
add FINRA Rules 0110 (Adoption of
Rules), 0120 (Effective Date), 0130
(Interpretation), 0140 (Applicability),
0160 (Definitions), 0170 (Delegation,
Authority and Access) and 0190
(Effective Date of Revocation,
Cancellation, Expulsion, Suspension or
Resignation) (collectively, the ‘‘General
Standards Rules’’), which will clarify
the applicability of these rules to
exempted securities, including
government securities.22 The General
Standards Rules govern the adoption,
application and interpretation of FINRA
rules and set forth specified definitions
not contained in the FINRA By-Laws. In
addition, these rules address FINRA’s
delegation of responsibilities to its
subsidiary, and its authority and access
with respect to its subsidiary. The
General Standards Rules apply to all
FINRA members, irrespective of
business model or client base.
Membership Rules
The proposed rule change would
amend FINRA Rule 0150(c) to include
FINRA Rule 1011 (Definitions), IM–
1011–1 (Safe Harbor for Business
Expansions), IM–1011–2 (Business
Expansions and Covered Pending
Arbitration Claims), IM–1011–3
(Business Expansions and Persons with
Specified Risk Events), Rule 1012
(General Provisions), Rule 1013 (New
Member Application and Interview),
IM–1013–1 (Membership Waive-In
Process for Certain New York Stock
Exchange Member Organizations), IM–
1013–2 (Membership Waive-In Process
for Certain NYSE American LLC
Member Organizations), Rule 1014
(Department Decision), Rule 1015
(Review by National Adjudicatory
Council), Rule 1016 (Discretionary
Review by FINRA Board), Rule 1017
(Application for Approval of Change in
Ownership, Control, or Business
Operations), Rule 1019 (Application to
the SEC for Review), Rule 1021 (Foreign
Members) and Rule 1122 (Filing of
Misleading Information as to
Membership or Registration) (together,
the ‘‘Membership Rules’’). The
Membership Rules provide a means for
FINRA, through its Membership
Application Program (‘‘MAP’’), to assess
the proposed business activities of
potential and current members with the
ultimate goal of ensuring that each
applicant is capable of conducting its
business in compliance with applicable
22 See supra note 14 (noting the application of the
general provisions of the Rules of Fair Practice to
government securities).
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rules and regulations, and that its
business practices are consistent with
just and equitable principles of trade.
The Membership Rules provide, for
example, the standards of review for
new member applications (‘‘NMAs’’)
and continuing membership
applications (‘‘CMAs’’). In addition,
among other requirements, the
Membership Rules require
consideration of whether persons
associated with an applicant have
disciplinary actions taken against them
by other industry authorities, customer
complaints, adverse arbitrations,
pending or unadjudicated matters, civil
actions, remedial actions imposed or
other industry-related matters that could
pose a threat to public investors. The
Membership Rules apply to all
applicants for membership and all
existing members. FINRA does not have
a separate membership process for
persons engaged in activities relating to
exempted securities, including
government securities.
The following is a summary of the
Membership Rules:
• FINRA Rule 1011 (defines relevant
terms for purposes of the Membership
Rules);
• FINRA IM–1011–1 (creates a safe
harbor for certain types of expansions
that are presumed not to be a ‘‘material
change in business operations’’ and,
therefore, do not require a member to
file a CMA pursuant to FINRA Rule
1017);
• FINRA IM–1011–2 (provides that
the safe harbor for business expansions
in FINRA IM–1011–1 is not available to
any member that is seeking to add one
or more associated persons involved in
sales and one or more of those
associated persons has a ‘‘covered
pending arbitration claim,’’ an unpaid
arbitration award or unpaid settlement
related to an arbitration);
• FINRA IM–1011–3 (provides that
the safe harbor for business expansions
in FINRA IM–1011–1 is not available to
any member that is seeking to add a
natural person who has, in the prior five
years, one or more ‘‘final criminal
matters’’ or two or more ‘‘specified risk
events’’ and seeks to become an owner,
control person, principal, or registered
person of the member);
• FINRA Rule 1012 (provides
information regarding, among others,
the methods for submitting the
applications required by the other
Membership Rules, provisions
governing when a membership
application is considered to have lapsed
as well as rules on ex parte
communications in the event that a
member requests review of a FINRA
membership decision by the National
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Adjudicatory Council (‘‘NAC’’),
pursuant to FINRA Rule 1015);
• FINRA Rule 1013 (sets forth the
requirements for an NMA, including
how to file, the documents that
applicants must submit, the ability of
FINRA to request additional
documentation and to reject an
application that is ‘‘not substantially
complete,’’ and the process for
conducting membership interviews);
• FINRA IM–1013–1 and IM–1013–2
(establish a waive-in process to expedite
the approval of membership
applications of NYSE-only member
organizations and NYSE American
member organizations that were
required to become FINRA members
following the consolidation of NASD
and NYSE’s member regulation
operations); 23
• FINRA Rule 1014 (sets forth the
standards for admission, the process
and timing for granting or denying an
application, the timing and content
requirements for FINRA’s decision and
submission of a membership agreement
and the effectiveness of restrictions in
the membership agreement);
• FINRA Rule 1015 (permits an
applicant to submit a request for review
by the NAC of an adverse decision
rendered on an NMA or a CMA);
• FINRA Rule 1016 (permits a
governor of the FINRA Board to call for
a discretionary review of a membership
proceeding);
• FINRA Rule 1017 (provides that
specified changes in a member’s
ownership, control or business
operations require the firm to file a
CMA, which is subject to FINRA
approval);
• FINRA Rule 1019 (provides that a
person aggrieved by final action of
FINRA under the Membership Rules
may apply for review by the SEC);
• FINRA Rule 1021 (sets forth
specific obligations for foreign members,
which are members that do not maintain
an office in the United States that is
responsible for preparing and
maintaining financial and other reports
required to be filed with the SEC and
FINRA); and
• FINRA Rule 1122 (prohibits
members and associated persons from
filing with FINRA incomplete or
misleading membership or registration
information).
Registration Rules
The proposed rule change would
amend FINRA Rule 0150(c) to add to the
list of rules that are applicable to
exempted securities, including
government securities, the rules relating
23 See
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to the qualification and registration of
associated persons (collectively, the
‘‘Registration Rules’’). In general, the
Registration Rules: (1) require that
persons engaged in a member’s
investment banking or securities
business who are to function as
representatives or principals register
with FINRA in each category of
registration appropriate to their
functions by passing one or more
qualification examinations; (2) exempt
specified associated persons from the
registration requirements; and (3)
provide for permissive registration of
specified persons. FINRA believes that
the identified Registration Rules are
applicable to government securities
because they are applicable to the
activities of all members, irrespective of
business model or client base.24
Specifically, the proposed rule change
would add the following Registration
Rules to FINRA Rule 0150(c):
• FINRA Rule 1010 (Electronic Filing
Requirements for Uniform Forms) (sets
forth the filing and signature
requirements for the Uniform Forms
(e.g., Form U4 (Uniform Application for
Securities Industry Registration or
Transfer)); and
• FINRA Rule 1200 Series
(Registration and Qualification):
Æ FINRA Rule 1210 (Registration
Requirements) (requires that each
person engaged in the investment
banking or securities business of a
member register with FINRA as a
representative or principal in each
category of registration appropriate to
his or her functions and responsibilities
as specified in FINRA Rule 1220, unless
exempt from registration pursuant to
FINRA Rule 1230. FINRA Rule 1210
also provides that such person is not
qualified to function in any registered
capacity other than that for which the
person is registered, unless otherwise
stated in the rules); 25
24 FINRA anticipates specifically addressing the
application of some of the Registration Rules,
including FINRA Rules 1220(a)(5) (Investment
Banking Principal), 1220(a)(6) (Research Principal),
1220(a)(7) (Securities Trader Principal), 1220(b)(4)
(Securities Trader), 1220(b)(5) (Investment Banking
Representative) and 1220(b)(6) (Research Analyst),
to government securities activities as part of a
separate proposal.
25 Further, FINRA Rule 1210 addresses the
following: (1) requirement to have a minimum
number of registered principals; (2) ability to
maintain permissive registrations for associated
persons; (3) requirement to pass an appropriate
qualification examination(s); (4) process for
obtaining a waiver of a qualification examination(s);
(5) requirements applicable to registered persons
functioning as principals prior to passing an
appropriate principal qualification examination; (6)
rules of conduct for taking examinations and
confidentiality of examinations; (7) waiting periods
for retaking a failed examination; (8) requirement
that registered persons satisfy continuing education;
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Æ FINRA Rule 1220 (Registration
Categories) (sets forth the definitions of
‘‘principal’’ and ‘‘representative’’ as
well as the qualification and registration
requirements for, among others, General
Securities Principals, Financial and
Operations Principals, Registered
Options Principals, Government
Securities Principals, General Securities
Sales Supervisors, General Securities
Representatives and Operations
Professionals); 26
Æ FINRA Rule 1230 (Associated
Persons Exempt from Registration)
(identifies associated persons who are
not required to be registered with
FINRA, including, among others,
associated persons whose functions are
solely and exclusively clerical or
ministerial); 27 and
Æ FINRA Rule 1240 (Continuing
Education Requirements) (sets forth the
continuing education requirements,
which consist of a Regulatory Element
and a Firm Element, and the
Maintaining Qualifications Program
through which eligible individuals may
maintain their qualification in a
representative or principal registration
category following the termination of
that registration category).
Rules Relating to Members’ Financial
Condition and Margin-Related Rules
The proposed rule change would
amend FINRA Rule 0150(c) to add rules
that have general applicability to
members and relate to members’
financial condition and margin
practices.28 These rules play an
important role in supporting the SEC’s
minimum net capital and other financial
responsibility requirements and support
FINRA’s authority to execute effectively
its financial and operational
(9) lapse of registration and expiration of the
Securities Industry Essentials examination; (10)
waiver of examinations for individuals working for
a financial services industry affiliate; (11) status of
persons serving in the Armed Forces of the United
States; and (12) impermissible registrations.
26 The rule also addresses the following: (1) status
of certain foreign registrations; (2) additional
requirements for registered persons engaged in
security futures activities; (3) requirements
applicable to members operating with only one
Registered Options Principal; (4) scope of the
General Securities Sales Supervisor category; (5)
scope of the Operations Professional category; and
(6) status of eliminated registration categories.
27 In addition, the rule clarifies that the function
of accepting customer orders is not considered a
clerical or ministerial function.
28 FINRA notes that rules relating to members’
financial condition historically have been
applicable to all members, including sole
government securities broker-dealers. For example,
Section 6 of the Government Securities Rules,
which applied to sole government securities brokerdealers before the Government Securities Rules
merged into the Rules of Fair Practice in 1996,
governed the regulation of activities of members
experiencing financial or operational difficulties.
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62141
surveillance and examination programs.
In general, these rules: (1) establish
criteria promoting the permanency of
members’ capital; (2) require the review
and approval of specific material
financial transactions; and (3) establish
criteria intended to identify members
approaching financial difficulty and to
monitor their financial and operational
condition.
Several of the rules relating to
members’ financial condition and
margin requirements, including, for
example, FINRA Rules 4120 (Regulatory
Notification and Business Curtailment),
4130 (Regulation of Activities of Section
15C Members Experiencing Financial
and/or Operational Difficulties) and
4210 (Margin Requirements) are
currently listed in FINRA Rule 0150 as
applicable to transactions in exempted
securities, including government
securities. For conformity, FINRA is
proposing to amend FINRA Rule 0150(c)
to include other financial conditionand margin-related rules of general
applicability. As a result, the proposed
rule change would amend FINRA Rule
0150(c) to add the following rules to the
list of rules that are applicable to
exempted securities, including
government securities:
• FINRA Rule 2264 (Margin
Disclosure Statement) (requires
members that open margin accounts for
or on behalf of non-institutional
customers to deliver to such customers,
prior to or at the time of opening the
account, a specified margin disclosure
statement highlighting the risks
involved in trading securities in a
margin account);
• FINRA Rule 2266 (SIPC
Information) (sets forth specified
requirements for providing Securities
Investor Protection Corporation (SIPC)
information to customers); 29
• FINRA Rule 4100 Series (Financial
Condition)
Æ FINRA Rule 4110 (Capital
Compliance) (sets forth requirements
relating to a member’s financial
responsibility, including, among others:
authorizing FINRA to prescribe greater
net capital requirements for carrying
and clearing members when deemed
necessary for the protection of investors
or in the public interest; requiring
members to suspend all business
operations during any period in which
a member is not in compliance with the
applicable net capital requirements of
29 FINRA notes that the Securities Investor
Protection Act of 1970 (‘‘SIPA’’) excludes a
government securities broker or dealer from the
definition of ‘‘persons registered as brokers or
dealers’’ for purposes of SIPA. See 15 U.S.C.
78lll(12). Therefore, FINRA Rule 2266 does not
apply to such members.
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SEA Rule 15c3–1; governing the
limitations on the withdrawal of a firm’s
equity capital; providing for sale-andleasebacks, factoring, financing loans
and similar arrangements; addressing
subordinated loans, notes collateralized
by securities and capital borrowing;
addressing compliance with other
applicable laws for purposes of the
approval of a subordinated loan
agreement; and providing that the
requirements of the rule also apply to
members that clear customer
transactions or hold customer funds in
a bank account pursuant to the
exemptive provisions of SEA Rule
15c3–3(k)(2)(i));
Æ FINRA Rule 4111 (Restricted Firm
Obligations) (allows FINRA to impose
obligations on members with
significantly higher levels of risk-related
disclosures than other similarly sized
peers, based on numeric, thresholdbased criteria);
Æ FINRA Rule 4140 (Audit) (provides
FINRA the authority to request an audit
or an agreed-upon procedures review
under circumstances specified in the
rule);
Æ FINRA Rule 4150 (Guarantees by,
or Flow Through Benefits for, Members)
(sets forth the notice requirement when
a member guarantees, endorses or
assumes, directly or indirectly, the
obligations or liabilities of another
person (including an entity), and the
approval requirements when a member
receives flow-through capital benefits in
accordance with Appendix C of SEA
Rule 15c3–1); and
Æ FINRA Rule 4160 (Verification of
Assets) (provides that a member, when
notified by FINRA, may not continue to
custody or retain record ownership of
assets at a non-member financial
institution, which, upon FINRA staff’s
request, fails promptly to provide
FINRA with written verification of
assets maintained by the member at
such financial institution);
• FINRA Rule 4200 Series (Margin):
Æ FINRA Rule 4220 (Daily Record of
Required Margin) (sets forth the
requirements for daily recordkeeping of
initial and maintenance margin calls
that are issued pursuant to the Federal
Reserve Board’s Regulation T and the
FINRA margin rules); 30 and
30 The initial margin requirement on exempted
securities held in a margin account is the margin
required by the broker in good faith or applicable
SRO margin requirement, whichever is greater.
Accordingly, the initial margin requirements on
exempted securities positions set by FINRA Rule
4210 act as a floor on the requirement under
Regulation T. Rule 4220 requires members to make
a daily record of initial or additional margin that
must be obtained in a customer’s account as set
forth in Rule 4210.
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Æ FINRA Rule 4230 (Required
Submissions for Requests for Extensions
of Time Under Regulation T and SEA
Rule 15c3–3) (governs members’
requests for extensions of time, as
permitted in accordance with the
Federal Reserve Board’s Regulation T
and SEA Rule 15c3–3(n)); 31
• FINRA Rule 4310 Series (Member
Agreements and Contracts):
Æ FINRA Rule 4314 (Securities Loans
and Borrowings) (sets forth the
obligations of a firm that engages in
lending and borrowing securities and
establishes consistent disclosure and
recordkeeping requirements relating to a
firm’s securities lending activities);
• FINRA Rule 4340 (Callable
Securities) (provides clarity to
customers about the procedures used by
a member when a security is called or
redeemed prior to maturity);
• FINRA Rule 4520 Series (Financial
Records and Reporting Requirements):
Æ FINRA Rule 4521 (Notifications,
Questionnaires and Reports) (addresses
FINRA’s authority to request financial
and operational information from
members to carry out its surveillance
and examination responsibilities and
sets forth the reporting requirements for
members carrying margin accounts for
customers);
Æ FINRA Rule 4522 (Periodic
Security Counts, Verifications and
Comparisons) (requires each member
that is subject to the requirements of
SEA Rule 17a–13 to make the counts,
examinations, verifications,
comparisons and entries set forth in
SEA Rule 17a–13 and further requires
each carrying or clearing member
subject to SEA Rule 17a–13 to make
more frequent counts, examinations,
verifications, comparisons and entries
31 Section 220.4(c)(3)(i) of Regulation T requires
any margin call to be satisfied within one payment
period (four business days) after the margin
deficiency is created, but Section 220.4(c)(3)(ii) of
Regulation T allows a broker-dealer to obtain an
extension of that payment period from its
examining authority. This time limit applies to all
transactions effected in margin accounts, including
transactions in exempted securities. Accordingly,
firms may make Regulation T extension requests
involving exempted securities that are governed by
FINRA Rule 4230.
In addition, under SEA Rule 15c3–3(m), as
modified by Treasury Rules 403.1 and 403.4(m), if
an exempted security sold long by a customer has
not been delivered within 30 business days (60
business days if it is a mortgage-backed security)
after the settlement date, the broker-dealer generally
must buy-in the customer. If a national securities
association is satisfied that a broker-dealer is acting
in good faith and exceptional circumstances
warrant the action, the national securities
association may, on application from the brokerdealer, grant an extension of the time before the
broker-dealer must buy-in the customer. Therefore,
FINRA Rule 4230, which governs these requests for
extensions of time is applicable to transactions in
exempted securities.
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where prudent business practice would
require);
Æ FINRA Rule 4523 (Assignment of
Responsibility for General Ledger
Accounts and Identification of Suspense
Accounts) (sets forth requirements
intended to ensure the accuracy of a
member’s financial books and records,
including the requirement that each
member designate an associated person
to be responsible for each general ledger
bookkeeping account and account of
like function used by the member); and
Æ FINRA Rule 4524 (Supplemental
FOCUS Information) (requires each
member, as FINRA designates, to file as
a supplement to the FOCUS Report,
additional financial or operational
schedules or reports as FINRA deems
necessary or appropriate for the
protection of investors or in the public
interest); 32 and
• FINRA Rule 4540 (Reporting
Requirements for Clearing Firms)
(requires each member clearing firm or
self-clearing firm to report to FINRA in
such format as FINRA may require,
prescribed data pertaining to the
member and any member broker-dealer
for which it clears; the rule also
provides that a member may submit a
written request for exemptive relief,
pursuant to the FINRA Rule 9600 Series
(Procedures for Exemptions), from the
reporting requirements of Rule 4540,
and specifies the circumstances under
which FINRA will grant such exemptive
requests).
FINRA acknowledges that some of the
rules listed above do not apply to
members that are sole government
securities broker-dealers because such
members are subject to separate laws,
rules and regulations or are otherwise
excluded from the FINRA requirements.
For example, as noted above, a
government securities broker or dealer
is excluded from the definition of
‘‘persons registered as brokers or
32 The Supplemental Statement of Income
(‘‘SSOI’’), the Supplemental Inventory Schedule
(‘‘SIS’’) and the Derivatives and Other Off-Balance
Sheet Items Schedule (‘‘OBS’’), all of which were
adopted pursuant to FINRA Rule 4524 as
supplements to the FOCUS Report, require the
reporting of various figures that are based on all
securities, including government securities. While
firms that are government securities broker-dealers
do not file a FOCUS Report and instead are required
to file reports concerning their financial and
operational status using the Finances and
Operations of Government Securities Brokers and
Dealers Report (‘‘FOGS Report’’), such firms are
subject to FINRA Rule 4524 and the financial or
operational schedules or reports, as designated by
FINRA, adopted pursuant to that rule. See e.g.,
Securities Exchange Act Release No. 73192
(September 23, 2014), 79 FR 58390 (September 29,
2014) (Order Approving File No. SR–FINRA–2014–
025) (approving the adoption of the SIS, including
with respect to filers of FOGS Reports).
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dealers’’ for purposes of SIPA.33
Therefore, FINRA Rule 2266 does not
apply to such members. In addition,
members that are registered government
securities brokers and dealers are
subject to separate capital compliance
provisions from those set forth in
FINRA Rule 4110.34 By listing these
rules under FINRA Rule 0150(c), FINRA
is not changing the underlying
requirements otherwise applicable to
such members.
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Rules Relating to Members’ Books and
Records and General Supervisory
Obligations
FINRA Rule 3110 (Supervision) and
the FINRA Rule 4510 Series (Books and
Records Requirements) apply to
transactions in exempted securities,
including government securities, and
are currently listed in FINRA Rule
0150(c). FINRA Rule 3110 requires a
firm to establish and maintain a system
to supervise the activities of its
associated persons that is reasonably
designed to achieve compliance with
the applicable securities laws and
regulations and FINRA rules. The rule
details requirements for a firm to have
reasonably designed written supervisory
procedures (‘‘WSPs’’) to supervise the
activities of its associated persons and
the types of businesses in which it
engages. Among other things, a firm’s
WSPs must address supervision of
supervisory personnel and provide for
the review of a firm’s investment
banking and securities business,
correspondence and internal
communications, and customer
complaints. The rules governing books
and records, including the FINRA Rule
4510 Series, in general, require members
to make and preserve specific books and
records to show compliance with
applicable securities laws, rules and
regulations, and to enable FINRA and
SEC staffs to conduct effective
examinations.
FINRA is proposing a conforming
change to FINRA Rule 0150(c) to
expressly include those rules of general
applicability that are based on, or
related to, the obligations imposed by
FINRA Rule 3110 and the FINRA Rule
4510 Series. In particular, the proposed
rule change would add the following
rules to the list of rules in FINRA Rule
0150(c):
• FINRA Rule 3100 Series
(Supervisory Responsibilities):
Æ FINRA Rule 3120 (Supervisory
Control System) (establishes the
33 See
15 U.S.C. 78lll(12) and supra note 29.
17 CFR 402.2 (setting forth the capital
requirements for registered government securities
brokers and dealers).
34 See
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requirements on members to test and
verify supervisory procedures);
Æ FINRA Rule 3130 (Annual
Certification of Compliance and
Supervisory Processes) (requires each
member to designate one or more
principals to serve as a chief compliance
officer(s) and further requires that the
chief executive officer(s) certify
annually that the member has in place
processes to establish, maintain, review,
modify and test policies and procedures
reasonably designed to achieve
compliance with applicable FINRA
rules, MSRB rules and federal securities
laws and regulations);
Æ FINRA Rule 3150 (Holding of
Customer Mail) (allows a firm to hold a
customer’s mail for a specific time
period in accordance with the
customer’s written instructions if the
firm meets several conditions);
Æ FINRA Rule 3160 (Networking
Arrangements Between Members and
Financial Institutions) (provides the
conditions for a member that is a party
to a networking arrangement with a
financial institution under which the
member offers broker-dealer services,
regardless of whether the member is
conducting broker-dealer services on or
off the premises of a financial
institution); and
Æ FINRA Rule 3170 (Tape Recording
of Registered Persons by Certain Firms)
(requires a firm to establish, enforce and
maintain special written procedures
supervising the telemarketing activities
of all of its registered persons, including
the tape recording of conversations, if
the firm has hired more than a specified
percentage of registered persons from
firms that meet the rule’s definition of
‘‘disciplined firm’’);
• FINRA Rule 3200 Series
(Responsibilities Relating to Associated
Persons):
Æ FINRA Rule 3230 (Telemarketing)
(requires members to maintain do-notcall lists, to limit the hours of telephone
solicitations and prohibits members
from using deceptive and abusive acts
and practices in connection with
telemarketing);
Æ FINRA Rule 3240 (Borrowing From
or Lending to Customers) (provides
members the opportunity to evaluate the
appropriateness of particular lending
arrangements between their registered
persons and customers, to the extent
permitted by the member, and the
potential for conflicts of interests
between both the registered person and
his or her customer and the registered
person and the member with which he
or she is associated);
Æ FINRA Rule 3241 (Registered
Person Being Named a Customer’s
Beneficiary or Holding a Position of
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62143
Trust for a Customer) (limits a registered
person from being named a beneficiary,
executor or trustee, or to have a power
of attorney or similar position of trust
for or on behalf of a customer); and
Æ FINRA Rule 3250 (Designation of
Accounts) (establishes a general
requirement that a member must hold
each customer account in the customer’s
name, except that a member may
identify a customer’s account with a
number or symbol, as long as the
member maintains documentation
identifying the customer);
• FINRA Rule 3300 Series (AntiMoney Laundering):
Æ FINRA Rule 3310 (Anti-Money
Laundering Compliance Program)
(requires each member to develop and
implement a written anti-money
laundering program reasonably
designed to achieve and monitor the
member’s compliance with the Bank
Secrecy Act and its implementing
regulations);
• FINRA Rule 4570 (Custodian of
Books and Records) (requires a member
to designate as the custodian of its
required books and records, pursuant to
SEA Rule 17a–4, on Form BDW
(Uniform Request for Broker-Dealer
Withdrawal) a person who is associated
with the firm at the time Form BDW is
filed); and
• FINRA Rule 4580 (Books and
Records Requirements for Government
Distribution and Solicitation Activities)
(establishes the recordkeeping
requirements in connection with FINRA
Rule 2030 (Engaging in Distribution and
Solicitation Activities with Government
Entities) and requires covered members
that engage in distribution or
solicitation activities with a government
entity on behalf of any investment
adviser that provides or is seeking to
provide investment advisory services to
such government entity to maintain
books and records that will allow
FINRA to examine for compliance with
FINRA Rule 2030).35
Procedural Rules
FINRA is proposing to amend FINRA
Rule 0150(c) to add a number of
procedural rules—including the FINRA
Code of Procedure, Code of Arbitration
Procedure for Customer Disputes, Code
of Arbitration Procedure for Industry
Disputes, Code of Mediation Procedure
and other procedural rules—to clarify
their application to transactions in, or
business activities relating to, exempted
securities, including government
securities. These rules of general
applicability provide the procedural
framework for FINRA to ensure that
35 See
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members and associated persons
comply with FINRA rules, MSRB rules
and the federal securities laws and
provide for the effective and efficient
resolution of customer and industry
disputes.
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Code of Procedure
FINRA believes that the FINRA Rule
9000 Series (Code of Procedure) is
applicable to transactions in exempted
securities. The Code of Procedure
governs proceedings for disciplining
members and associated persons
(including review of disciplinary
proceedings by the NAC and FINRA
Board and application for SEC review),
proceedings for regulating the activities
of members experiencing financial or
operational difficulties, and proceedings
for suspensions, cancellations and bars.
These are foundational rules applicable
to all FINRA members, irrespective of
business model or client base, and they
provide the procedural framework for
enforcing many of the rules listed in
FINRA Rule 0150.36 In this regard,
several of the rules that are currently
applicable to exempted securities would
be rendered operationally meaningless
without the application of the Code of
Procedure. For example, the sanctions
under FINRA Rule 8310 (Sanctions for
Violation of the Rules) are contingent on
compliance with the Code of Procedure.
securities, including government
securities, to be submitted to the Office
of Dispute Resolution for arbitration
under the Code of Arbitration Procedure
without limitation.37
The proposed rule change would
amend FINRA Rule 0150(c) to add the
FINRA Rule 14000 Series (Code of
Mediation Procedure) to the list of rules
that are expressly applicable to
transactions in, and business activities
relating to, exempted securities,
including government securities.
FINRA’s mediation forum serves an
important public interest and furthers
investor protection by providing a
valuable alternative to arbitration. The
Code of Mediation Procedure provides
the procedural framework for parties
wishing to mediate disputes through
FINRA’s mediation program. The Code
of Mediation Procedure contains, for
example, provisions governing the effect
of mediation on arbitration proceedings,
mediator selection, mediation ground
rules and fees for mediation. Similar to
the Codes, the Code of Mediation
Procedure has general applicability to
all FINRA members.
FINRA Arbitration and Mediation Codes
The FINRA Rule 12000 Series (Code
of Arbitration Procedure for Customer
Disputes or ‘‘Customer Code’’) and
FINRA Rule 13000 Series (Code of
Arbitration Procedure for Industry
Disputes or ‘‘Industry Code’’)
(collectively, the ‘‘Codes’’) contain the
rules that govern arbitration between
investors and industry parties and
between or among industry-only parties.
The Codes provide, among other things,
the procedural rules for arbitration,
initiating and responding to claims, the
appointment of arbitrators, arbitration
discovery, hearing and fees and awards.
These rules are essential to the
arbitration forum and have general
applicability to all FINRA members,
irrespective of business model or client
base. As such, FINRA is proposing to
amend FINRA Rule 0150 to explicitly
add the Codes as applicable to
transactions in exempted securities,
including government securities. FINRA
notes that, following the GSAA, FINRA
amended the Code of Arbitration
Procedure to explicitly allow claims
relating to transactions in exempted
Other Procedural and Related Rules
In addition to the procedural rules
discussed above, FINRA proposes to
amend FINRA Rule 0150(c) to add
FINRA Rules 2080 (Obtaining an Order
of Expungement of Customer Dispute
Information from the Central
Registration Depository (CRD) System),
2081 (Prohibited Conditions Relating to
Expungement of Customer Dispute),
2263 (Arbitration Disclosure to
Associated Persons Signing or
Acknowledging Form U4) and 8313
(Release of Disciplinary Complaints,
Decisions and Other Information) to the
list of rules that are applicable to
transactions in, and business activities
relating to, exempted securities,
including government securities.
FINRA recognizes that accurate and
complete reporting in the CRD system is
an important component of investor
protection, and FINRA Rules 2080 and
2081, which have general applicability
to all FINRA members, further this
purpose.
FINRA Rule 2080 addresses the
expungement of customer dispute
information from the CRD system and
provides that a court of competent
jurisdiction must order or confirm all
expungement directives before FINRA
will expunge customer dispute
information from the CRD system. The
rule also requires that FINRA members
36 The Rule 9000 Series also includes FINRA’s
revolving door rules, which are applicable to all
firm types.
37 See Securities Exchange Act Release No. 40103
(June 19, 1998), 63 FR 34951 (June 26, 1998) (Order
Approving File No. SR–NASD–98–04).
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or associated persons name FINRA as an
additional party in any court proceeding
in which they seek an order to expunge
customer dispute information or request
confirmation of an award containing an
order of expungement, unless the
requirement is waived in accordance
with the rule.
FINRA Rule 2081 prohibits members
and associated persons from
conditioning or seeking to condition
settlement of a dispute with a customer
on, or to otherwise compensate the
customer for, the customer’s agreement
to consent to, or not to oppose, the
firm’s or associated person’s request to
expunge such customer dispute
information from the CRD system.
FINRA Rule 2263 requires members to
provide each associated person,
whenever the associated person is asked
to sign a new or amended Form U4,
with certain written disclosures
regarding the nature and process of
arbitration proceedings. This rule
ensures that associated persons of all
members understand that the Form U4
contains a predispute arbitration clause
and that by signing the Form U4, the
associated persons are agreeing to be
bound by the arbitration proceedings.
The rule applies generally to all
members and associated persons.
FINRA Rule 8313 governs FINRA’s
release of disciplinary and other
information to the public. The rule is
applicable to all members, irrespective
of business model or client base.
Trade Reporting and Operational Rules
FINRA is also proposing to amend
FINRA Rule 0150(c) to add several trade
reporting and operational rules that
have general application to the conduct
of members. Specifically, the proposed
rule change would add the following
rules to FINRA Rule 0150(c):
• FINRA Rule 4370 (Business
Continuity Plans and Emergency
Contact Information) (requires a member
to create, maintain, review at least
annually and update upon any material
change, a written business continuity
plan identifying procedures relating to
an emergency or significant business
disruption and enumerates the
minimum elements that a member’s
business continuity plan must address,
to the extent those elements are
applicable and necessary to the firm’s
business);
• FINRA Rule 4380 (Mandatory
Participation in FINRA BC/DR Testing
Under Regulation SCI) (authorizes
FINRA to designate firms that are
subject to mandatory participation in
business continuity and disaster
recovery (BC/DR) testing under
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Regulation SCI, which will be
conducted once per year);
• FINRA Rule 4590 (Synchronization
of Member Business Clocks) (requires
that firms synchronize their business
clocks that are used for purposes of
recording the date and time of any event
that must be recorded pursuant to the
FINRA By-Laws or other FINRA rules
(e.g., the time a trade was executed or
the time an order was received or
routed), with reference to a time source
as designated by FINRA); 38
• FINRA Rule 7730 (Trade Reporting
and Compliance Engine (TRACE)) (sets
forth the TRACE transaction reporting
fees and the TRACE data products
offered by FINRA and the fees
associated with those products); 39 and
• FINRA Rule 8211 (Automated
Submission of Trading Data Requested
by FINRA) (requires members to submit
specified trade data in automated format
as may be prescribed by FINRA).
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Other Rules
Finally, FINRA is proposing to amend
FINRA Rule 0150(c) to add other rules
that relate to customer protection and
have general applicability to the
conduct of members and associated
persons or that are applicable to
exempted securities, including
government securities. These other rules
are:
• FINRA Rule 2030 (Engaging in
Distribution and Solicitation Activities
with Government Entities) (regulates
members engaging in distribution or
solicitation activities with government
entities on behalf of investment
advisers); 40
38 Rule 4590 applies to members’ business clocks
that are used for purposes of recording the date and
time of any event that must be recorded pursuant
to the FINRA By-Laws or other FINRA rules. As
specified in Rule 6730(e)(8), an ‘‘Auction
Transaction’’ in a U.S. Treasury Security, as defined
under FINRA rules, shall not be reported to FINRA.
Accordingly, the application of Rule 4590 to
exempted securities does not cover auction
transactions in U.S. Treasury securities, and it does
not alter members’ obligations to comply with any
clock synchronization requirements otherwise
applicable to U.S. Treasury securities auctions.
39 FINRA notes, however, that Rule 7730(b), by its
terms, currently excludes transactions in U.S.
Treasury Securities, as defined under FINRA rules,
from the TRACE transaction reporting fees. See
Securities Exchange Act Release No. 79116,
(October 18, 2016), 81 FR 73167, 73169 (October 24,
2016) (Order Approving File No. SR–FINRA–2016–
027). See also supra note 21.
40 FINRA Rule 2030 is modeled after Rule 206(4)5 under the Investment Advisers Act of 1940 (‘‘SEC
Pay-to-Play Rule’’) that addresses pay-to-play
practices by investment advisers. See Securities
Exchange Act Release No. 78683 (August 25, 2016),
81 FR 60051 (August 31, 2016) (Order Approving
File No. SR–FINRA–2015–056) (‘‘Approval Order’’);
see also Investment Advisers Act Release No. 4532
(September 20, 2016), 81 FR 66526 (September 28,
2016) (finding that Rule 2030 imposes substantially
equivalent or more stringent restrictions on
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• FINRA Rule 2040 (Payments to
Unregistered Persons) (governs the
payment of transaction-based
compensation by members to
unregistered persons, including retired
representatives and foreign finders);
• FINRA Rule 2070 (Transactions
Involving FINRA Employees) (addresses
conflicts of interests involving FINRA
employees and plays a vital role in
helping FINRA monitor whether
employees are abiding by trading
restrictions imposed by the FINRA Code
of Conduct);
• FINRA Rule 2090 (Know Your
Customer) (requires members to use
reasonable diligence in regard to the
opening and maintenance of every
account, in order to know and retain the
essential facts concerning every
customer to effectively service customer
accounts, act in accordance with any
special handling instructions,
understand the authority of each person
acting on behalf of customers, and
comply with applicable laws,
regulations and rules);
• FINRA Rule 2130 (Approval
Procedures for Day-Trading Accounts)
(requires firms that promote day-trading
strategies, directly or indirectly, to
deliver the risk disclosure statement set
forth in FINRA Rule 2270 (Day-Trading
Risk Disclosure Statement), to a noninstitutional customer prior to opening
the account for the customer, and to (1)
approve the customer’s account for daytrading in accordance with procedures
set forth in the rule or (2) obtain a
written agreement from the customer
stating that the customer does not
intend to use the account for daytrading activities);
• FINRA Rule 2140 (Interfering With
the Transfer of Customer Accounts in
the Context of Employment Disputes)
(prohibits members or associated
persons from interfering with a
customer’s request to transfer his or her
account in connection with the change
in employment of the customer’s
registered representative, provided that
the account is not subject to any lien for
monies owed by the customer or other
bona fide claim);
members than the SEC Pay-to-Play Rule imposes on
investment advisers and is consistent with the
objectives of the SEC Pay-to-Play Rule). Neither the
SEC Pay-to-Play Rule nor FINRA’s Rule 2030
exclude specific products, see Approval Order, 81
FR 60051, 60058–59. In addition, both the SEC Payto-Play Rule and FINRA Rule 2030 define the term
‘‘government entity’’ to mean any state or political
subdivision of a state, including their agencies,
authorities and instrumentalities, a pool of assets
sponsored or established by the state or political
subdivision or any agency, authority or
instrumentality thereof, or a plan or program of
such government entity. See 17 CFR 275.206(4)5(f)(5); FINRA Rule 2030(g)(6).
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62145
• FINRA Rule 2165 (Financial
Exploitation of Specified Adults)
(permits members to place temporary
holds on disbursements of funds or
securities from the accounts of specified
customers where there is a reasonable
belief of financial exploitation of such
customers);
• FINRA Rule 2213 (Requirements for
the Use of Bond Mutual Fund Volatility
Ratings) (imposes conditions and
disclosure requirements on a firm that
distributes a retail communication that
includes a ‘‘bond mutual fund volatility
rating,’’ including that the rating must
be based on objective factors, such as
the credit quality of the fund’s
individual portfolio holdings, the
market price volatility of the portfolio,
the fund’s performance, and specific
risks, such as interest rate risk,
prepayment risk and currency risk);
• FINRA Rule 2214 (Requirements for
the Use of Investment Analysis Tools)
(provides a limited exception to the
general prohibition on members’
communications that predict or project
performance, as set forth in paragraph
(d)(1)(F) of FINRA Rule 2210
(Communications with the Public), for
investment analysis tools, provided that
specified conditions are met);
• FINRA Rule 2216 (Communications
with the Public About Collateralized
Mortgage Obligations (‘‘CMOs’’)) (sets
forth standards applicable to retail
communications concerning CMOs);
• FINRA Rule 2220 (Options
Communications) (sets forth a member’s
obligations with respect to its options
communications with the public); 41
• FINRA Rule 2267 (Investor
Education and Protection) (requires
members to provide customers at least
once every calendar year in writing
(which may be electronic) with: (1)
FINRA’s website address; (2) the
BrokerCheck hotline number; and (3) a
statement regarding the availability of
an investor brochure that includes
information describing BrokerCheck);
41 At the time of the 1996 Approval Order, FINRA
Rule 2220 required that firms designate a specific
individual as a Compliance Registered Options
Principal with responsibility for approving certain
options communications. The rule has changed
since that time, eliminating this operational
condition, and currently requires that, among other
things, a designated Registered Options Principal(s)
review and approve all retail communications,
which would allow more than one individual to
review and approve such communications.
Moreover, all firms that are engaged in, or intend
to engage in, transactions in options with the public
must have at least one Registered Options Principal
pursuant to FINRA Rule 1220(a)(8) (Registered
Options Principal). FINRA believes that the
requirements relating to options on government
securities should be consistent, to the extent
applicable, with the requirements for options
covered by FINRA Rule 2360 (Options).
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Federal Register / Vol. 87, No. 197 / Thursday, October 13, 2022 / Notices
• FINRA Rule 2270 (Day-Trading Risk
Disclosure Statement) (requires firms
that promote day-trading strategies,
directly or indirectly, to deliver the risk
disclosure statement set forth in the rule
to a non-institutional customer prior to
opening the account for the customer);
• FINRA Rule 2272 (Sales and Offers
of Sales of Securities on Military
Installations) (governs sales and offers of
sales of securities by members on the
premises of any military installation to
members of the Armed Forces of the
United States or their dependents); 42
• FINRA Rule 2273 (Educational
Communication Related to Recruitment
Practices and Account Transfers)
(provides that a member that hires or
associates with a registered
representative must furnish to a former
customer of the representative,
individually (in paper or electronic
form) required educational
communication when: (1) the member,
directly or through a representative,
individually contacts a former customer
of that representative to transfer assets;
or (2) a former customer of the
representative, absent individual
contact, transfers assets to an account
assigned, or to be assigned, to the
representative at the member); and
• FINRA Rule 2360 (Options)
(addresses specific risks that pertain to
options, and implements provisions of
the federal securities laws and SEC
rules, including, among other things,
provisions requiring specific disclosure
documents, additional diligence in
approving the opening of accounts, and
specific requirements for confirmations,
account statements, suitability,
recordkeeping and reporting).43
Capital Acquisition Broker Rules
khammond on DSKJM1Z7X2PROD with NOTICES
The CAB Rules are a separate set of
FINRA rules for firms that meet the
definition of a ‘‘capital acquisition
broker’’ and that elect to be governed
under this rule set. CABs are members
that engage in a limited range of
activities, essentially advising
42 Rule 2272 requires, among other things, a
member 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 his or
her dependents to provide a clear and conspicuous
disclosure with the identity of the member offering
the securities and stating that the securities are not
being offered or provided by the member of behalf
of the Federal Government, and that the offer of
such securities is not sanctioned, recommended or
encouraged by the Federal Government. See Rule
2272(b). The rule applies to all members seeking to
engage in sales or offers of sales of securities,
irrespective of the type of securities offered. While
some exempted securities are issued by the U.S.
Federal Government (e.g., U.S. Treasury securities),
other exempted securities (e.g., group variable
contracts) are not.
43 See supra note 41.
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companies and private equity funds on
capital raising and corporate
restructuring, and acting as placement
agents for sales of unregistered
securities to institutional investors
under limited conditions. Members that
elect to be governed under the CAB rule
set are not permitted, among other
things, to carry or maintain customer
accounts, handle customers’ funds or
securities, accept customers’ trading
orders, or engage in proprietary trading
or market-making.44
CAB Rule 015 states that FINRA Rule
0150 shall apply to the CAB Rules.
FINRA proposes to amend CAB Rule
015 to more closely track the text of
FINRA Rule 0150, and to be consistent
with the revisions to FINRA Rule 0150
made pursuant to this rule filing.
Proposed CAB Rule 015(a), which
defines the terms ‘‘exempted securities’’
and ‘‘municipal securities,’’ is exactly
the same as FINRA Rule 0150(a).
Similar to FINRA Rule 0150(b),
proposed CAB Rule 015(b) provides that
the CAB Rules are not intended to be,
and shall not be construed as, rules
concerning transactions in municipal
securities.
Proposed CAB Rule 015(c) resembles
FINRA Rule 0150(c), but refers to the
CAB Rules that apply to transactions in,
and business activities related to,
exempted securities, except municipal
securities, conducted by CABs and their
associated persons, rather than to
FINRA Rules. In this regard, FINRA
proposes to apply all CAB Rules, other
than CAB Rules 512 (Private Placements
of Securities Issued by Members) and
515 (Fairness Opinions), to such
transactions and activities, because
either the CAB Rule provides that all
CABs are subject to a FINRA Rule
included in FINRA Rule 0150(c), or the
CAB Rule has provisions that are similar
to those in FINRA Rules included in
FINRA Rule 0150(c). FINRA does not
propose to apply CAB Rules 512 and
515 to such activities and transactions,
because those rules provide that CABs
are subject to FINRA Rules 5122 and
5150, respectively, which are not
included in FINRA Rule 0150(c).
Proposed CAB Rule 015(d) provides
that nothing in this Rule shall be
deemed to expand or otherwise alter the
scope of activities permitted for CABs
under CAB Rule 016(c) (the definition of
‘‘capital acquisition broker’’). The
purpose of this provision is to make
clear that CAB Rule 015 is not intended
to define the scope of activities in which
CABs may engage. Instead, CAB Rule
016(c) defines what activities in which
a CAB may engage.
FINRA has filed the proposed rule
change for immediate effectiveness. The
implementation date will be 270 days
after the date of the filing.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,45 which
requires, among other things, that
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. As stated
above, the proposed rule change does
not impact the current status of any of
the listed rules, but serves to modernize
FINRA Rule 0150 to include rules of
general applicability to all FINRA
members.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 46 and Rule 19b–
4(f)(6) thereunder.47
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.
45 15
U.S.C. 78o–3(b)(6).
U.S.C. 78s(b)(3)(A).
47 17 CFR 240.19b–4(f)(6).
46 15
44 See
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Federal Register / Vol. 87, No. 197 / Thursday, October 13, 2022 / Notices
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:
[FR Doc. 2022–22174 Filed 10–12–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
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–
FINRA–2022–028 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.48
J. Lynn Taylor,
Assistant Secretary.
All submissions should refer to File
Number SR–FINRA–2022–028. 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 website (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 website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of such filing
also will be available for inspection and
copying at the principal office of
FINRA. All comments received will be
posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FINRA–
2022–028 and should be submitted on
or before November 3, 2022.
[Release No. 34–96006; File No. SR–MIAX–
2022–35]
Self-Regulatory Organizations: Notice
of Filing and Immediate Effectiveness
of a Proposed Rule Change by Miami
International Securities Exchange LLC
To Amend Its Fee Schedule
October 7, 2022.
Pursuant to the provisions of section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on October 4, 2022, Miami International
Securities Exchange LLC (‘‘MIAX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) a 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
The Exchange is filing a proposal to
amend the MIAX Options Fee Schedule
(the ‘‘Fee Schedule’’).
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings, at MIAX’s principal office, and
at the Commission’s Public Reference
Room.
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
48 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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62147
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend the
Fee Schedule to (i) amend the Other
Market Participant Transaction Fees
table 3 to amend the fee applicable to the
option component of a stock-option
order; and (ii) modify the Priority
Customer Rebate Program (‘‘PCRP’’) 4 as
it pertains to per contract credits for
PRIME Agency Orders submitted by
Priority Customers.5 The Exchange
initially filed this proposal on
September 1, 2022 as SR–MIAX–2022–
28. On September 20, 2022, the
Exchange withdrew SR–MIAX–2022–28
and resubmitted the proposal as SR–
MIAX–2022–31. On September 28,
2022, the Exchange withdrew SR–
MIAX–2022–31 and resubmitted the
proposal as SR–MIAX–2022–33. On
October 4, 2022, the Exchange withdrew
SR–MIAX–2022–33 and resubmitted the
proposal as SR–MIAX–2022–35. The
proposed changes are immediately
effective.
Background
Stock-Option Orders
A ‘‘complex order’’ is any order
involving the concurrent purchase and/
or sale of two or more different options
in the same underlying security (the
‘‘legs’’ or ‘‘components’’ of the complex
order), for the same account, in a ratio
that is equal to or greater than one-tothree (.333) and less than or equal to
three-to-one (3.00) and for the purposes
3 See Section (1)(a)(ii) of the Exchange’s Fee
Schedule.
4 Under the PCRP, MIAX Options credits each
Member the per contract amount resulting from
each Priority Customer order transmitted by that
Member which is executed electronically on the
Exchange in all multiply-listed option classes
(excluding, in simple or complex as applicable,
QCC and cQCC Orders, mini-options, Priority
Customer-to-Priority Customer Orders, C2C and
cC2C Orders, PRIME and cPRIME AOC Responses,
PRIME and cPRIME Contra-side Orders, PRIME and
cPRIME Orders for which both the Agency and
Contra-side Order are Priority Customers, and
executions related to contracts that are routed to
one or more exchanges in connection with the
Options Order Protection and Locked/Crossed
Market Plan referenced in Exchange Rule 1400),
provided the Member meets certain percentage
thresholds in a month as described in the Priority
Customer Rebate Program table. See Fee Schedule,
Section (1)(a)(iii).
5 The term ‘‘Priority Customer’’ means a person
or entity that (i) is not a broker or dealer in
securities, and (ii) does not place more than 390
orders in listed options per day on average during
a calendar month for its own beneficial account(s).
See Exchange Rule 100.
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]]>Agencies
[Federal Register Volume 87, Number 197 (Thursday, October 13, 2022)]
[Notices]
[Pages 62137-62147]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-22174]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95990; File No. SR-FINRA-2022-028]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Amend FINRA Rule 0150 (Application of Rules to
Exempted Securities Except Municipal Securities)
October 6, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 29, 2022, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by FINRA.
FINRA has designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under
the Act,\3\ which renders the proposal effective upon receipt of this
filing by the Commission. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend paragraph (c) of FINRA Rule 0150
(Application of Rules to Exempted Securities Except Municipal
Securities) to clarify the application of specified
[[Page 62138]]
FINRA rules to transactions in, and business activities relating to,
exempted securities, including government securities (other than
municipal securities).\4\ The proposed rule change would also amend
Capital Acquisition Broker (``CAB'') Rule 015 (Application of Rules to
Municipal Securities) to more closely track the text of FINRA Rule
0150, and for consistency with the revisions to FINRA Rule 0150 made
pursuant to this rule filing.
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\4\ For purposes of the proposed rule change, the terms
``exempted securities,'' ``government securities'' and ``municipal
securities'' shall have the meanings as specified in Exchange Act
Sections 3(a)(12), 3(a)(42) and 3(a)(29), respectively. 15 U.S.C.
78c(a)(12), (a)(42) and (a)(29).
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Below is the text of the proposed rule change. Proposed new
language is underlined; proposed deletions are in brackets.\5\
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\5\ FINRA notes that some of the rules listed in FINRA Rule
0150(c) include provisions that are not applicable to government
securities in whole or in part. For instance, notwithstanding the
presence of FINRA Rule 2232 in FINRA Rule 0150(c), FINRA Rule
2232(b) is inapplicable by its terms to government securities that
are not also equity securities. In addition, FINRA Rules 2232(c)
through (f) are not applicable to U.S. Treasury securities. See
Securities Exchange Act Release No. 79346 (November 17, 2016), 81 FR
84659, 84661 (November 23, 2016) (Order Approving File No. SR-FINRA-
2016-032). FINRA also notes that some of the rules listed in FINRA
Rule 0150(c) are applicable to exempted securities other than
government securities. For example, FINRA Rule 2320(g) (Member
Compensation) is applicable to group variable contracts that are
exempted securities.
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FINRA Rules
* * * * *
0100. General Standards
* * * * *
0150. Application of Rules to Exempted Securities Except Municipal
Securities
(a) through (b) No Change.
(c) Unless otherwise indicated within a particular Rule, the
following rules are applicable to transactions in, and business
activities relating to, exempted securities, except municipal
securities, conducted by members and associated persons: Rules 0110,
0120, 0130, 0140, 0160, 0170, 0190, 1010, 1011, IM-1011-1, IM-1011-2,
IM-1011-3, 1012, 1013, IM-1013-1, IM-1013-2, 1014, 1015, 1016, 1017,
1019, 1020, 1021, 1122, 1200 Series (other than Rules 1220(a)(5),
(a)(6), (a)(7), (b)(4), (b)(5) and (b)(6)), 2010, 2020, 2030, 2040,
2060, 2070, 2080, 2081, 2090, 2111, 2122, 2130, 2140, 2150, 2165, 2210,
2211, 2212, 2213, 2214, 2216, 2220, 2231, 2232, 2261, 2263, 2264, 2266,
2267, 2268, 2269, 2270, 2272, 2273, 2320(g), 2360, [3110] 3100 Series,
3200 Series, [3210, 3220, 3260, 3270, 3280,] 3300 Series, 4100 Series,
[4120, 4130,] 4210, 4220, 4230, 4310 Series, [4311,] 4330, 4340, 4360,
4370, 4380, 4510 Series, 4520 Series, 4530, 4540, 4570, 4580, 4590,
5160, 5210, 5220, 5230, 5310, 5340, 6700 Series, 7730, 8100 Series,
[8110, 8120,] 8210, 8211, 8300 Series, [8310, 8311, 8312, 8320, 8330]
9000 Series [and 9552], 12000 Series, 13000 Series, and 14000 Series.
* * * * *
Capital Acquisition Broker Rules
010. General Standards
* * * * *
015. Application of Rules to Exempted Securities Except Municipal
Securities
[FINRA Rule 0150 shall apply to the Capital Acquisition Broker
Rules.]
(a) For purposes of this Rule, the terms ``exempted securities''
and ``municipal securities'' shall have the meanings specified in
Sections 3(a)(12) and 3(a)(29) of the Exchange Act, respectively.
(b) The Capital Acquisition Broker Rules are not intended to be,
and shall not be construed as, rules concerning transactions in
municipal securities.
(c) Unless otherwise indicated within a particular Rule, all
Capital Acquisition Broker Rules are applicable to transactions in, and
business activities related to, exempted securities, except municipal
securities, conducted by capital acquisition brokers and their
associated persons, other than Capital Acquisition Broker Rules 512 and
515.
(d) Nothing in this Rule shall be deemed to expand or otherwise
alter the scope of activities permitted for capital acquisition brokers
under Capital Acquisition Broker Rule 016(c).
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA 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. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
Prior to 1986, broker-dealers engaged solely in a government
securities business were not required to register with the SEC and
become members of a registered securities exchange or a registered
securities association, such as FINRA (then NASD).\6\ Moreover, the
Exchange Act expressly prohibited FINRA from adopting and enforcing
compliance with its rules in connection with transactions by its
members in exempted securities, including government securities.\7\
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\6\ On July 30, 2007, NASD and NYSE consolidated their member
regulation, enforcement and dispute resolution operations into a
combined organization, FINRA. See Securities Exchange Act Release
No. 56145 (July 26, 2007), 72 FR 42169 (August 1, 2007), as amended
by Securities Exchange Act Release No. 56145A (May 30, 2008), 73 FR
32377 (June 6, 2008) (Order Approving File No. SR-NASD-2007-023).
For consistency purposes, when discussing FINRA or the predecessor
NASD, this filing will refer solely to FINRA.
\7\ Specifically, Section 15A(f) of the Exchange Act provided
that ``[n]othing in this section shall be construed to apply with
respect to any transaction by a broker or dealer in any exempted
security.'' See 15 U.S.C. 78o-3 (historical notes).
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The Government Securities Act of 1986 (``GSA''),\8\ however,
amended the Exchange Act to require broker-dealers that engaged
exclusively in transactions in government securities to register with
the SEC and become members of a registered securities exchange or a
registered securities association if they effected transactions in, or
induced or attempted to induce the purchase or sale of, any government
securities.\9\ The GSA also amended the Exchange Act to authorize a
registered securities association, such as FINRA, to adopt and
implement rules for specified limited purposes to govern transactions
by its members in exempted securities (other than municipal
securities).\10\ The
[[Page 62139]]
GSA did not authorize FINRA to apply its rules, including its sales
practice rules (which were then part of the Rules of Fair Practice),
that were outside of those specified areas to transactions in exempted
securities.\11\ In 1988, FINRA amended its existing rules and adopted
new rules to carry out its responsibilities under the GSA.\12\
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\8\ Public Law 99-571, 100 Stat. 3208 (1986).
\9\ See supra note 8. (amending the Exchange Act to add Section
15C(a)(1)(A) to require the registration of a government securities
broker or dealer).
\10\ The GSA, among other things, amended Section 15A(f) to add
paragraph (2), which provided that a registered securities
association could adopt and implement rules with respect to exempted
securities to (A) enforce compliance with applicable provisions of
the Exchange Act; (B) provide for appropriate discipline of members
for violations of applicable provisions of the Exchange Act; (C)
provide for reasonable inspection and examination of members' books
and records; (D) deny or condition the membership of a broker-dealer
that does not meet standards for financial responsibility or conduct
under the Exchange Act; (E) bar any person from being associated
with a member if such person has engaged in prohibited conduct or
refused to provide requested information; and (F) prohibit
fraudulent, misleading, deceptive and false advertising. See 100
Stat. 3208, 3218.
\11\ In contrast, the GSA did not prevent registered securities
exchanges, such as the NYSE, from applying their rules to government
securities transactions. See United States Government Accountability
Office, U.S. Government Securities: More Transaction Information and
Investor Protection Measures Are Needed, September 1990 at 47
(noting that although the GSA did not authorize FINRA to apply its
sales practice rules to government securities transactions, the GSA
did not prevent registered securities exchanges, such as the NYSE,
from applying their rules to government securities transactions),
available at https://www.gao.gov/assets/ggd-90-114.pdf.
\12\ Specifically, FINRA amended its By-Laws to address
government securities transactions by members and the eligibility of
sole government securities broker-dealers to become members. FINRA
also amended Schedule C to the NASD By-Laws, which contained rules
relating to membership and registration, to provide for the
registration of government securities principals and government
securities representatives. In addition, FINRA adopted a subset of
rules designated as ``Government Securities Rules,'' which addressed
books and records, supervisory procedures and the regulation of
members experiencing financial or operational difficulties or
changing their exemptive status under SEA Rule 15c3-3. The
Government Securities Rules also included provisions regarding
communications with the public and FINRA's ability to bring
disciplinary actions for violations involving government securities
transactions. See Securities Exchange Act Release No. 26240
(November 2, 1988), 53 FR 45412 (November 9, 1988) (Order Approving
File No. SR-NASD-88-12). The terms ``sole government securities
broker-dealers,'' ``government securities broker-dealers,''
``registered government securities brokers and dealers'' and
``government securities broker or dealer'' as used in this proposed
rule change refer to brokers and dealers that engage exclusively in
transactions in government securities and that are registered under
Section 15C of the Exchange Act.
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In 1993, Congress enacted the Government Securities Act Amendments
of 1993 (``GSAA''), which removed all previous limitations on the
ability of FINRA to apply its rules, including its sales practice
rules, to transactions by members in exempted securities, other than
municipal securities.\13\ Subsequently, in 1996, with oversight by the
SEC and the SEC's consultation with the Department of the Treasury,
FINRA specified provisions of its Rules of Fair Practice that would be
applicable to exempted securities, other than municipal securities.\14\
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\13\ Government Securities Act Amendments of 1993, Public Law
103-202, 1(a), 107 Stat. 2344 (1993).
\14\ See Securities Exchange Act Release No. 37588 (August 20,
1996), 61 FR 44100 (August 27, 1996) (Order Approving File No. SR-
NASD-95-39) (``1996 Approval Order''). While not expressly listed as
rules applicable to exempted securities in the 1996 Approval Order,
the 1996 Approval Order noted that the general provisions of
Articles I and II of the Rules of Fair Practice relating to the
adoption, application and definitions of rules, which were formerly
in the Government Securities Rules, also applied to government
securities. In addition, the 1996 Approval Order stated that
Schedule C to the By-Laws would apply to the personnel of sole
government securities broker-dealers, including persons selling
options on government securities.
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In 2001, for ease of reference, FINRA adopted NASD Rule 0116 (now
FINRA Rule 0150), which was intended to codify, with some
additions,\15\ the rules that were approved by the Commission as
applicable to transactions in, and business activities relating to,
government securities, and more broadly exempted securities (other than
municipal securities), and that were expressly listed in the 1996
Approval Order.\16\ FINRA has amended Rule 0150 since its original
adoption, but it has not updated the rule routinely.\17\
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\15\ NASD Rule 0116 codified a FINRA staff interpretation that
the non-cash compensation provisions of NASD Rule 2820(g) (now FINRA
Rule 2320(g)) apply to group variable contracts that are exempted
securities.
\16\ See Securities Exchange Act Release No. 44631 (July 31,
2001), 66 FR 41283 (August 7, 2001) (Order Approving File No. SR-
NASD-00-38).
\17\ For example, in 2015, FINRA amended Rule 0150 to expressly
apply FINRA Rule 2121 (Fair Prices and Commissions) to transactions
in exempted securities that are government securities. See
Securities Exchange Act Release No. 76639 (December 14, 2015), 80 FR
79112 (December 18, 2015) (Order Approving File No. SR-FINRA-2015-
033). In addition, FINRA has replaced references to NASD rules when
those rules were transferred into the FINRA rulebook as consolidated
FINRA rules. See, e.g., Securities Exchange Act Release No. 78851
(September 15, 2016), 81 FR 64969 (September 21, 2016) (Notice of
Filing and Immediate Effectiveness of File No. SR-FINRA-2016-036)
(replacing NASD IM-2210-2 with FINRA Rule 2211).
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More recently, on August 19, 2016, the SEC's Division of Trading
and Markets requested that FINRA undertake a comprehensive review of
its rulebook to identify existing FINRA rules that exclude or may
otherwise not apply to U.S. Treasury securities (or government
securities more generally), or for which the applicability of the rule
to U.S. Treasury securities requires clarification, and to assess the
continuing validity for such exclusions.\18\ In response, FINRA
undertook a review of its rulebook for this purpose.\19\ FINRA also
reviewed its rulebook to identify the rules that are applicable to
government securities, and those rules whose applicability to
government securities requires clarification. On October 17, 2016,
FINRA submitted a letter in response to the Commission's request.\20\
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\18\ See Letter from Stephen Luparello, Director, Division of
Trading and Markets, SEC, to Robert W. Cook, President and Chief
Executive Officer, FINRA, dated August 19, 2016, available at
https://www.sec.gov/divisions/marketreg/letter-to-finra-regulation-of-us-treasury-securities.pdf.
\19\ The current FINRA rulebook consists of (1) FINRA rules; and
(2) the Temporary Dual FINRA-NYSE Member Rule Series (formerly
Incorporated NYSE Rules and Incorporated NYSE Rule Interpretations).
While the FINRA rules generally apply to all FINRA members, the
Temporary Dual FINRA-NYSE Member Rule Series apply solely to those
members of FINRA that are also members of NYSE on or after July 30,
2007. As previously mentioned, the Temporary Dual FINRA-NYSE Member
Rule Series historically were not subject to the same limitations
with respect to their applicability to government securities as
FINRA rules. See supra note 11. Accordingly, FINRA believes that the
Temporary Dual FINRA-NYSE Member Rule Series currently apply to
exempted securities, including government securities, unless
otherwise indicated by a particular rule.
\20\ See Letter from Robert W. Cook, President and Chief
Executive Officer, FINRA, to Stephen Luparello, Director, Division
of Trading and Markets, SEC, dated October 17, 2016, available at
https://www.sec.gov/divisions/marketreg/letter-from-finra-regulation-of-us-treasury-securities.pdf.
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Rules To Be Added to FINRA Rule 0150
As an initial step in responding to the SEC staff's request, the
proposed rule change would amend FINRA Rule 0150(c) to add to its list
of rules those that are currently applicable to exempted securities,
including government securities, but which are not currently listed in
that rule. The rules that FINRA is proposing to add are rules that have
general application to the activities of all FINRA members,
irrespective of business model or client base. In addition, the
proposed rule change would modernize and make current the list of rules
in Rule 0150. It is not intended to substantively change the current
application or requirements of FINRA rules to exempted securities. As
stated in Rule 0150, the application of any listed rules, or specific
provisions of those rules, to exempted securities, including government
securities, is governed by the language of the rule itself.\21\
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\21\ For example, FINRA Rule 7730(b), by its terms, currently
excludes transactions in U.S. Treasury Securities, as defined under
FINRA rules, from the TRACE transaction reporting fees. See
Securities Exchange Act Release No. 79116, (October 18, 2016), 81 FR
73167, 73169 (October 24, 2016) (Order Approving File No. SR-FINRA-
2016-027). While the proposed rule change would amend Rule 0150 to
include Rule 7730, Rule 7730(b) would continue by its terms to
exclude transactions in U.S. Treasury Securities, as defined under
FINRA rules. Further, in updating FINRA Rule 0150, FINRA is not
suggesting that every type of exempted security is subject to each
rule listed in paragraph (c). It could be the case that a listed
rule applies, by its terms, to a subcategory of exempted securities
based on the characteristics of that security. For example, FINRA
understands that U.S. Treasury securities do not have callable
features. However, government-sponsored enterprises (``GSEs''),
whose securities are considered by statute to be exempted
securities, may issue callable securities.
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[[Page 62140]]
General Standards Rules
The proposed rule change would amend FINRA Rule 0150(c) to
expressly add FINRA Rules 0110 (Adoption of Rules), 0120 (Effective
Date), 0130 (Interpretation), 0140 (Applicability), 0160 (Definitions),
0170 (Delegation, Authority and Access) and 0190 (Effective Date of
Revocation, Cancellation, Expulsion, Suspension or Resignation)
(collectively, the ``General Standards Rules''), which will clarify the
applicability of these rules to exempted securities, including
government securities.\22\ The General Standards Rules govern the
adoption, application and interpretation of FINRA rules and set forth
specified definitions not contained in the FINRA By-Laws. In addition,
these rules address FINRA's delegation of responsibilities to its
subsidiary, and its authority and access with respect to its
subsidiary. The General Standards Rules apply to all FINRA members,
irrespective of business model or client base.
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\22\ See supra note 14 (noting the application of the general
provisions of the Rules of Fair Practice to government securities).
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Membership Rules
The proposed rule change would amend FINRA Rule 0150(c) to include
FINRA Rule 1011 (Definitions), IM-1011-1 (Safe Harbor for Business
Expansions), IM-1011-2 (Business Expansions and Covered Pending
Arbitration Claims), IM-1011-3 (Business Expansions and Persons with
Specified Risk Events), Rule 1012 (General Provisions), Rule 1013 (New
Member Application and Interview), IM-1013-1 (Membership Waive-In
Process for Certain New York Stock Exchange Member Organizations), IM-
1013-2 (Membership Waive-In Process for Certain NYSE American LLC
Member Organizations), Rule 1014 (Department Decision), Rule 1015
(Review by National Adjudicatory Council), Rule 1016 (Discretionary
Review by FINRA Board), Rule 1017 (Application for Approval of Change
in Ownership, Control, or Business Operations), Rule 1019 (Application
to the SEC for Review), Rule 1021 (Foreign Members) and Rule 1122
(Filing of Misleading Information as to Membership or Registration)
(together, the ``Membership Rules''). The Membership Rules provide a
means for FINRA, through its Membership Application Program (``MAP''),
to assess the proposed business activities of potential and current
members with the ultimate goal of ensuring that each applicant is
capable of conducting its business in compliance with applicable rules
and regulations, and that its business practices are consistent with
just and equitable principles of trade. The Membership Rules provide,
for example, the standards of review for new member applications
(``NMAs'') and continuing membership applications (``CMAs''). In
addition, among other requirements, the Membership Rules require
consideration of whether persons associated with an applicant have
disciplinary actions taken against them by other industry authorities,
customer complaints, adverse arbitrations, pending or unadjudicated
matters, civil actions, remedial actions imposed or other industry-
related matters that could pose a threat to public investors. The
Membership Rules apply to all applicants for membership and all
existing members. FINRA does not have a separate membership process for
persons engaged in activities relating to exempted securities,
including government securities.
The following is a summary of the Membership Rules:
FINRA Rule 1011 (defines relevant terms for purposes of
the Membership Rules);
FINRA IM-1011-1 (creates a safe harbor for certain types
of expansions that are presumed not to be a ``material change in
business operations'' and, therefore, do not require a member to file a
CMA pursuant to FINRA Rule 1017);
FINRA IM-1011-2 (provides that the safe harbor for
business expansions in FINRA IM-1011-1 is not available to any member
that is seeking to add one or more associated persons involved in sales
and one or more of those associated persons has a ``covered pending
arbitration claim,'' an unpaid arbitration award or unpaid settlement
related to an arbitration);
FINRA IM-1011-3 (provides that the safe harbor for
business expansions in FINRA IM-1011-1 is not available to any member
that is seeking to add a natural person who has, in the prior five
years, one or more ``final criminal matters'' or two or more
``specified risk events'' and seeks to become an owner, control person,
principal, or registered person of the member);
FINRA Rule 1012 (provides information regarding, among
others, the methods for submitting the applications required by the
other Membership Rules, provisions governing when a membership
application is considered to have lapsed as well as rules on ex parte
communications in the event that a member requests review of a FINRA
membership decision by the National Adjudicatory Council (``NAC''),
pursuant to FINRA Rule 1015);
FINRA Rule 1013 (sets forth the requirements for an NMA,
including how to file, the documents that applicants must submit, the
ability of FINRA to request additional documentation and to reject an
application that is ``not substantially complete,'' and the process for
conducting membership interviews);
FINRA IM-1013-1 and IM-1013-2 (establish a waive-in
process to expedite the approval of membership applications of NYSE-
only member organizations and NYSE American member organizations that
were required to become FINRA members following the consolidation of
NASD and NYSE's member regulation operations); \23\
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\23\ See supra note 6.
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FINRA Rule 1014 (sets forth the standards for admission,
the process and timing for granting or denying an application, the
timing and content requirements for FINRA's decision and submission of
a membership agreement and the effectiveness of restrictions in the
membership agreement);
FINRA Rule 1015 (permits an applicant to submit a request
for review by the NAC of an adverse decision rendered on an NMA or a
CMA);
FINRA Rule 1016 (permits a governor of the FINRA Board to
call for a discretionary review of a membership proceeding);
FINRA Rule 1017 (provides that specified changes in a
member's ownership, control or business operations require the firm to
file a CMA, which is subject to FINRA approval);
FINRA Rule 1019 (provides that a person aggrieved by final
action of FINRA under the Membership Rules may apply for review by the
SEC);
FINRA Rule 1021 (sets forth specific obligations for
foreign members, which are members that do not maintain an office in
the United States that is responsible for preparing and maintaining
financial and other reports required to be filed with the SEC and
FINRA); and
FINRA Rule 1122 (prohibits members and associated persons
from filing with FINRA incomplete or misleading membership or
registration information).
Registration Rules
The proposed rule change would amend FINRA Rule 0150(c) to add to
the list of rules that are applicable to exempted securities, including
government securities, the rules relating
[[Page 62141]]
to the qualification and registration of associated persons
(collectively, the ``Registration Rules''). In general, the
Registration Rules: (1) require that persons engaged in a member's
investment banking or securities business who are to function as
representatives or principals register with FINRA in each category of
registration appropriate to their functions by passing one or more
qualification examinations; (2) exempt specified associated persons
from the registration requirements; and (3) provide for permissive
registration of specified persons. FINRA believes that the identified
Registration Rules are applicable to government securities because they
are applicable to the activities of all members, irrespective of
business model or client base.\24\
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\24\ FINRA anticipates specifically addressing the application
of some of the Registration Rules, including FINRA Rules 1220(a)(5)
(Investment Banking Principal), 1220(a)(6) (Research Principal),
1220(a)(7) (Securities Trader Principal), 1220(b)(4) (Securities
Trader), 1220(b)(5) (Investment Banking Representative) and
1220(b)(6) (Research Analyst), to government securities activities
as part of a separate proposal.
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Specifically, the proposed rule change would add the following
Registration Rules to FINRA Rule 0150(c):
FINRA Rule 1010 (Electronic Filing Requirements for
Uniform Forms) (sets forth the filing and signature requirements for
the Uniform Forms (e.g., Form U4 (Uniform Application for Securities
Industry Registration or Transfer)); and
FINRA Rule 1200 Series (Registration and Qualification):
[cir] FINRA Rule 1210 (Registration Requirements) (requires that
each person engaged in the investment banking or securities business of
a member register with FINRA as a representative or principal in each
category of registration appropriate to his or her functions and
responsibilities as specified in FINRA Rule 1220, unless exempt from
registration pursuant to FINRA Rule 1230. FINRA Rule 1210 also provides
that such person is not qualified to function in any registered
capacity other than that for which the person is registered, unless
otherwise stated in the rules); \25\
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\25\ Further, FINRA Rule 1210 addresses the following: (1)
requirement to have a minimum number of registered principals; (2)
ability to maintain permissive registrations for associated persons;
(3) requirement to pass an appropriate qualification examination(s);
(4) process for obtaining a waiver of a qualification
examination(s); (5) requirements applicable to registered persons
functioning as principals prior to passing an appropriate principal
qualification examination; (6) rules of conduct for taking
examinations and confidentiality of examinations; (7) waiting
periods for retaking a failed examination; (8) requirement that
registered persons satisfy continuing education; (9) lapse of
registration and expiration of the Securities Industry Essentials
examination; (10) waiver of examinations for individuals working for
a financial services industry affiliate; (11) status of persons
serving in the Armed Forces of the United States; and (12)
impermissible registrations.
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[cir] FINRA Rule 1220 (Registration Categories) (sets forth the
definitions of ``principal'' and ``representative'' as well as the
qualification and registration requirements for, among others, General
Securities Principals, Financial and Operations Principals, Registered
Options Principals, Government Securities Principals, General
Securities Sales Supervisors, General Securities Representatives and
Operations Professionals); \26\
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\26\ The rule also addresses the following: (1) status of
certain foreign registrations; (2) additional requirements for
registered persons engaged in security futures activities; (3)
requirements applicable to members operating with only one
Registered Options Principal; (4) scope of the General Securities
Sales Supervisor category; (5) scope of the Operations Professional
category; and (6) status of eliminated registration categories.
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[cir] FINRA Rule 1230 (Associated Persons Exempt from Registration)
(identifies associated persons who are not required to be registered
with FINRA, including, among others, associated persons whose functions
are solely and exclusively clerical or ministerial); \27\ and
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\27\ In addition, the rule clarifies that the function of
accepting customer orders is not considered a clerical or
ministerial function.
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[cir] FINRA Rule 1240 (Continuing Education Requirements) (sets
forth the continuing education requirements, which consist of a
Regulatory Element and a Firm Element, and the Maintaining
Qualifications Program through which eligible individuals may maintain
their qualification in a representative or principal registration
category following the termination of that registration category).
Rules Relating to Members' Financial Condition and Margin-Related Rules
The proposed rule change would amend FINRA Rule 0150(c) to add
rules that have general applicability to members and relate to members'
financial condition and margin practices.\28\ These rules play an
important role in supporting the SEC's minimum net capital and other
financial responsibility requirements and support FINRA's authority to
execute effectively its financial and operational surveillance and
examination programs. In general, these rules: (1) establish criteria
promoting the permanency of members' capital; (2) require the review
and approval of specific material financial transactions; and (3)
establish criteria intended to identify members approaching financial
difficulty and to monitor their financial and operational condition.
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\28\ FINRA notes that rules relating to members' financial
condition historically have been applicable to all members,
including sole government securities broker-dealers. For example,
Section 6 of the Government Securities Rules, which applied to sole
government securities broker-dealers before the Government
Securities Rules merged into the Rules of Fair Practice in 1996,
governed the regulation of activities of members experiencing
financial or operational difficulties.
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Several of the rules relating to members' financial condition and
margin requirements, including, for example, FINRA Rules 4120
(Regulatory Notification and Business Curtailment), 4130 (Regulation of
Activities of Section 15C Members Experiencing Financial and/or
Operational Difficulties) and 4210 (Margin Requirements) are currently
listed in FINRA Rule 0150 as applicable to transactions in exempted
securities, including government securities. For conformity, FINRA is
proposing to amend FINRA Rule 0150(c) to include other financial
condition- and margin-related rules of general applicability. As a
result, the proposed rule change would amend FINRA Rule 0150(c) to add
the following rules to the list of rules that are applicable to
exempted securities, including government securities:
FINRA Rule 2264 (Margin Disclosure Statement) (requires
members that open margin accounts for or on behalf of non-institutional
customers to deliver to such customers, prior to or at the time of
opening the account, a specified margin disclosure statement
highlighting the risks involved in trading securities in a margin
account);
FINRA Rule 2266 (SIPC Information) (sets forth specified
requirements for providing Securities Investor Protection Corporation
(SIPC) information to customers); \29\
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\29\ FINRA notes that the Securities Investor Protection Act of
1970 (``SIPA'') excludes a government securities broker or dealer
from the definition of ``persons registered as brokers or dealers''
for purposes of SIPA. See 15 U.S.C. 78lll(12). Therefore, FINRA Rule
2266 does not apply to such members.
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FINRA Rule 4100 Series (Financial Condition)
[cir] FINRA Rule 4110 (Capital Compliance) (sets forth requirements
relating to a member's financial responsibility, including, among
others: authorizing FINRA to prescribe greater net capital requirements
for carrying and clearing members when deemed necessary for the
protection of investors or in the public interest; requiring members to
suspend all business operations during any period in which a member is
not in compliance with the applicable net capital requirements of
[[Page 62142]]
SEA Rule 15c3-1; governing the limitations on the withdrawal of a
firm's equity capital; providing for sale-and-leasebacks, factoring,
financing loans and similar arrangements; addressing subordinated
loans, notes collateralized by securities and capital borrowing;
addressing compliance with other applicable laws for purposes of the
approval of a subordinated loan agreement; and providing that the
requirements of the rule also apply to members that clear customer
transactions or hold customer funds in a bank account pursuant to the
exemptive provisions of SEA Rule 15c3-3(k)(2)(i));
[cir] FINRA Rule 4111 (Restricted Firm Obligations) (allows FINRA
to impose obligations on members with significantly higher levels of
risk-related disclosures than other similarly sized peers, based on
numeric, threshold-based criteria);
[cir] FINRA Rule 4140 (Audit) (provides FINRA the authority to
request an audit or an agreed-upon procedures review under
circumstances specified in the rule);
[cir] FINRA Rule 4150 (Guarantees by, or Flow Through Benefits for,
Members) (sets forth the notice requirement when a member guarantees,
endorses or assumes, directly or indirectly, the obligations or
liabilities of another person (including an entity), and the approval
requirements when a member receives flow-through capital benefits in
accordance with Appendix C of SEA Rule 15c3-1); and
[cir] FINRA Rule 4160 (Verification of Assets) (provides that a
member, when notified by FINRA, may not continue to custody or retain
record ownership of assets at a non-member financial institution,
which, upon FINRA staff's request, fails promptly to provide FINRA with
written verification of assets maintained by the member at such
financial institution);
FINRA Rule 4200 Series (Margin):
[cir] FINRA Rule 4220 (Daily Record of Required Margin) (sets forth
the requirements for daily recordkeeping of initial and maintenance
margin calls that are issued pursuant to the Federal Reserve Board's
Regulation T and the FINRA margin rules); \30\ and
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\30\ The initial margin requirement on exempted securities held
in a margin account is the margin required by the broker in good
faith or applicable SRO margin requirement, whichever is greater.
Accordingly, the initial margin requirements on exempted securities
positions set by FINRA Rule 4210 act as a floor on the requirement
under Regulation T. Rule 4220 requires members to make a daily
record of initial or additional margin that must be obtained in a
customer's account as set forth in Rule 4210.
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[cir] FINRA Rule 4230 (Required Submissions for Requests for
Extensions of Time Under Regulation T and SEA Rule 15c3-3) (governs
members' requests for extensions of time, as permitted in accordance
with the Federal Reserve Board's Regulation T and SEA Rule 15c3-3(n));
\31\
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\31\ Section 220.4(c)(3)(i) of Regulation T requires any margin
call to be satisfied within one payment period (four business days)
after the margin deficiency is created, but Section 220.4(c)(3)(ii)
of Regulation T allows a broker-dealer to obtain an extension of
that payment period from its examining authority. This time limit
applies to all transactions effected in margin accounts, including
transactions in exempted securities. Accordingly, firms may make
Regulation T extension requests involving exempted securities that
are governed by FINRA Rule 4230.
In addition, under SEA Rule 15c3-3(m), as modified by Treasury
Rules 403.1 and 403.4(m), if an exempted security sold long by a
customer has not been delivered within 30 business days (60 business
days if it is a mortgage-backed security) after the settlement date,
the broker-dealer generally must buy-in the customer. If a national
securities association is satisfied that a broker-dealer is acting
in good faith and exceptional circumstances warrant the action, the
national securities association may, on application from the broker-
dealer, grant an extension of the time before the broker-dealer must
buy-in the customer. Therefore, FINRA Rule 4230, which governs these
requests for extensions of time is applicable to transactions in
exempted securities.
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FINRA Rule 4310 Series (Member Agreements and Contracts):
[cir] FINRA Rule 4314 (Securities Loans and Borrowings) (sets forth
the obligations of a firm that engages in lending and borrowing
securities and establishes consistent disclosure and recordkeeping
requirements relating to a firm's securities lending activities);
FINRA Rule 4340 (Callable Securities) (provides clarity to
customers about the procedures used by a member when a security is
called or redeemed prior to maturity);
FINRA Rule 4520 Series (Financial Records and Reporting
Requirements):
[cir] FINRA Rule 4521 (Notifications, Questionnaires and Reports)
(addresses FINRA's authority to request financial and operational
information from members to carry out its surveillance and examination
responsibilities and sets forth the reporting requirements for members
carrying margin accounts for customers);
[cir] FINRA Rule 4522 (Periodic Security Counts, Verifications and
Comparisons) (requires each member that is subject to the requirements
of SEA Rule 17a-13 to make the counts, examinations, verifications,
comparisons and entries set forth in SEA Rule 17a-13 and further
requires each carrying or clearing member subject to SEA Rule 17a-13 to
make more frequent counts, examinations, verifications, comparisons and
entries where prudent business practice would require);
[cir] FINRA Rule 4523 (Assignment of Responsibility for General
Ledger Accounts and Identification of Suspense Accounts) (sets forth
requirements intended to ensure the accuracy of a member's financial
books and records, including the requirement that each member designate
an associated person to be responsible for each general ledger
bookkeeping account and account of like function used by the member);
and
[cir] FINRA Rule 4524 (Supplemental FOCUS Information) (requires
each member, as FINRA designates, to file as a supplement to the FOCUS
Report, additional financial or operational schedules or reports as
FINRA deems necessary or appropriate for the protection of investors or
in the public interest); \32\ and
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\32\ The Supplemental Statement of Income (``SSOI''), the
Supplemental Inventory Schedule (``SIS'') and the Derivatives and
Other Off-Balance Sheet Items Schedule (``OBS''), all of which were
adopted pursuant to FINRA Rule 4524 as supplements to the FOCUS
Report, require the reporting of various figures that are based on
all securities, including government securities. While firms that
are government securities broker-dealers do not file a FOCUS Report
and instead are required to file reports concerning their financial
and operational status using the Finances and Operations of
Government Securities Brokers and Dealers Report (``FOGS Report''),
such firms are subject to FINRA Rule 4524 and the financial or
operational schedules or reports, as designated by FINRA, adopted
pursuant to that rule. See e.g., Securities Exchange Act Release No.
73192 (September 23, 2014), 79 FR 58390 (September 29, 2014) (Order
Approving File No. SR-FINRA-2014-025) (approving the adoption of the
SIS, including with respect to filers of FOGS Reports).
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FINRA Rule 4540 (Reporting Requirements for Clearing
Firms) (requires each member clearing firm or self-clearing firm to
report to FINRA in such format as FINRA may require, prescribed data
pertaining to the member and any member broker-dealer for which it
clears; the rule also provides that a member may submit a written
request for exemptive relief, pursuant to the FINRA Rule 9600 Series
(Procedures for Exemptions), from the reporting requirements of Rule
4540, and specifies the circumstances under which FINRA will grant such
exemptive requests).
FINRA acknowledges that some of the rules listed above do not apply
to members that are sole government securities broker-dealers because
such members are subject to separate laws, rules and regulations or are
otherwise excluded from the FINRA requirements. For example, as noted
above, a government securities broker or dealer is excluded from the
definition of ``persons registered as brokers or
[[Page 62143]]
dealers'' for purposes of SIPA.\33\ Therefore, FINRA Rule 2266 does not
apply to such members. In addition, members that are registered
government securities brokers and dealers are subject to separate
capital compliance provisions from those set forth in FINRA Rule
4110.\34\ By listing these rules under FINRA Rule 0150(c), FINRA is not
changing the underlying requirements otherwise applicable to such
members.
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\33\ See 15 U.S.C. 78lll(12) and supra note 29.
\34\ See 17 CFR 402.2 (setting forth the capital requirements
for registered government securities brokers and dealers).
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Rules Relating to Members' Books and Records and General Supervisory
Obligations
FINRA Rule 3110 (Supervision) and the FINRA Rule 4510 Series (Books
and Records Requirements) apply to transactions in exempted securities,
including government securities, and are currently listed in FINRA Rule
0150(c). FINRA Rule 3110 requires a firm to establish and maintain a
system to supervise the activities of its associated persons that is
reasonably designed to achieve compliance with the applicable
securities laws and regulations and FINRA rules. The rule details
requirements for a firm to have reasonably designed written supervisory
procedures (``WSPs'') to supervise the activities of its associated
persons and the types of businesses in which it engages. Among other
things, a firm's WSPs must address supervision of supervisory personnel
and provide for the review of a firm's investment banking and
securities business, correspondence and internal communications, and
customer complaints. The rules governing books and records, including
the FINRA Rule 4510 Series, in general, require members to make and
preserve specific books and records to show compliance with applicable
securities laws, rules and regulations, and to enable FINRA and SEC
staffs to conduct effective examinations.
FINRA is proposing a conforming change to FINRA Rule 0150(c) to
expressly include those rules of general applicability that are based
on, or related to, the obligations imposed by FINRA Rule 3110 and the
FINRA Rule 4510 Series. In particular, the proposed rule change would
add the following rules to the list of rules in FINRA Rule 0150(c):
FINRA Rule 3100 Series (Supervisory Responsibilities):
[cir] FINRA Rule 3120 (Supervisory Control System) (establishes the
requirements on members to test and verify supervisory procedures);
[cir] FINRA Rule 3130 (Annual Certification of Compliance and
Supervisory Processes) (requires each member to designate one or more
principals to serve as a chief compliance officer(s) and further
requires that the chief executive officer(s) certify annually that the
member has in place processes to establish, maintain, review, modify
and test policies and procedures reasonably designed to achieve
compliance with applicable FINRA rules, MSRB rules and federal
securities laws and regulations);
[cir] FINRA Rule 3150 (Holding of Customer Mail) (allows a firm to
hold a customer's mail for a specific time period in accordance with
the customer's written instructions if the firm meets several
conditions);
[cir] FINRA Rule 3160 (Networking Arrangements Between Members and
Financial Institutions) (provides the conditions for a member that is a
party to a networking arrangement with a financial institution under
which the member offers broker-dealer services, regardless of whether
the member is conducting broker-dealer services on or off the premises
of a financial institution); and
[cir] FINRA Rule 3170 (Tape Recording of Registered Persons by
Certain Firms) (requires a firm to establish, enforce and maintain
special written procedures supervising the telemarketing activities of
all of its registered persons, including the tape recording of
conversations, if the firm has hired more than a specified percentage
of registered persons from firms that meet the rule's definition of
``disciplined firm'');
FINRA Rule 3200 Series (Responsibilities Relating to
Associated Persons):
[cir] FINRA Rule 3230 (Telemarketing) (requires members to maintain
do-not-call lists, to limit the hours of telephone solicitations and
prohibits members from using deceptive and abusive acts and practices
in connection with telemarketing);
[cir] FINRA Rule 3240 (Borrowing From or Lending to Customers)
(provides members the opportunity to evaluate the appropriateness of
particular lending arrangements between their registered persons and
customers, to the extent permitted by the member, and the potential for
conflicts of interests between both the registered person and his or
her customer and the registered person and the member with which he or
she is associated);
[cir] FINRA Rule 3241 (Registered Person Being Named a Customer's
Beneficiary or Holding a Position of Trust for a Customer) (limits a
registered person from being named a beneficiary, executor or trustee,
or to have a power of attorney or similar position of trust for or on
behalf of a customer); and
[cir] FINRA Rule 3250 (Designation of Accounts) (establishes a
general requirement that a member must hold each customer account in
the customer's name, except that a member may identify a customer's
account with a number or symbol, as long as the member maintains
documentation identifying the customer);
FINRA Rule 3300 Series (Anti-Money Laundering):
[cir] FINRA Rule 3310 (Anti-Money Laundering Compliance Program)
(requires each member to develop and implement a written anti-money
laundering program reasonably designed to achieve and monitor the
member's compliance with the Bank Secrecy Act and its implementing
regulations);
FINRA Rule 4570 (Custodian of Books and Records) (requires
a member to designate as the custodian of its required books and
records, pursuant to SEA Rule 17a-4, on Form BDW (Uniform Request for
Broker-Dealer Withdrawal) a person who is associated with the firm at
the time Form BDW is filed); and
FINRA Rule 4580 (Books and Records Requirements for
Government Distribution and Solicitation Activities) (establishes the
recordkeeping requirements in connection with FINRA Rule 2030 (Engaging
in Distribution and Solicitation Activities with Government Entities)
and requires covered members that engage in distribution or
solicitation activities with a government entity on behalf of any
investment adviser that provides or is seeking to provide investment
advisory services to such government entity to maintain books and
records that will allow FINRA to examine for compliance with FINRA Rule
2030).\35\
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\35\ See infra note 41.
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Procedural Rules
FINRA is proposing to amend FINRA Rule 0150(c) to add a number of
procedural rules--including the FINRA Code of Procedure, Code of
Arbitration Procedure for Customer Disputes, Code of Arbitration
Procedure for Industry Disputes, Code of Mediation Procedure and other
procedural rules--to clarify their application to transactions in, or
business activities relating to, exempted securities, including
government securities. These rules of general applicability provide the
procedural framework for FINRA to ensure that
[[Page 62144]]
members and associated persons comply with FINRA rules, MSRB rules and
the federal securities laws and provide for the effective and efficient
resolution of customer and industry disputes.
Code of Procedure
FINRA believes that the FINRA Rule 9000 Series (Code of Procedure)
is applicable to transactions in exempted securities. The Code of
Procedure governs proceedings for disciplining members and associated
persons (including review of disciplinary proceedings by the NAC and
FINRA Board and application for SEC review), proceedings for regulating
the activities of members experiencing financial or operational
difficulties, and proceedings for suspensions, cancellations and bars.
These are foundational rules applicable to all FINRA members,
irrespective of business model or client base, and they provide the
procedural framework for enforcing many of the rules listed in FINRA
Rule 0150.\36\ In this regard, several of the rules that are currently
applicable to exempted securities would be rendered operationally
meaningless without the application of the Code of Procedure. For
example, the sanctions under FINRA Rule 8310 (Sanctions for Violation
of the Rules) are contingent on compliance with the Code of Procedure.
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\36\ The Rule 9000 Series also includes FINRA's revolving door
rules, which are applicable to all firm types.
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FINRA Arbitration and Mediation Codes
The FINRA Rule 12000 Series (Code of Arbitration Procedure for
Customer Disputes or ``Customer Code'') and FINRA Rule 13000 Series
(Code of Arbitration Procedure for Industry Disputes or ``Industry
Code'') (collectively, the ``Codes'') contain the rules that govern
arbitration between investors and industry parties and between or among
industry-only parties. The Codes provide, among other things, the
procedural rules for arbitration, initiating and responding to claims,
the appointment of arbitrators, arbitration discovery, hearing and fees
and awards. These rules are essential to the arbitration forum and have
general applicability to all FINRA members, irrespective of business
model or client base. As such, FINRA is proposing to amend FINRA Rule
0150 to explicitly add the Codes as applicable to transactions in
exempted securities, including government securities. FINRA notes that,
following the GSAA, FINRA amended the Code of Arbitration Procedure to
explicitly allow claims relating to transactions in exempted
securities, including government securities, to be submitted to the
Office of Dispute Resolution for arbitration under the Code of
Arbitration Procedure without limitation.\37\
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\37\ See Securities Exchange Act Release No. 40103 (June 19,
1998), 63 FR 34951 (June 26, 1998) (Order Approving File No. SR-
NASD-98-04).
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The proposed rule change would amend FINRA Rule 0150(c) to add the
FINRA Rule 14000 Series (Code of Mediation Procedure) to the list of
rules that are expressly applicable to transactions in, and business
activities relating to, exempted securities, including government
securities. FINRA's mediation forum serves an important public interest
and furthers investor protection by providing a valuable alternative to
arbitration. The Code of Mediation Procedure provides the procedural
framework for parties wishing to mediate disputes through FINRA's
mediation program. The Code of Mediation Procedure contains, for
example, provisions governing the effect of mediation on arbitration
proceedings, mediator selection, mediation ground rules and fees for
mediation. Similar to the Codes, the Code of Mediation Procedure has
general applicability to all FINRA members.
Other Procedural and Related Rules
In addition to the procedural rules discussed above, FINRA proposes
to amend FINRA Rule 0150(c) to add FINRA Rules 2080 (Obtaining an Order
of Expungement of Customer Dispute Information from the Central
Registration Depository (CRD) System), 2081 (Prohibited Conditions
Relating to Expungement of Customer Dispute), 2263 (Arbitration
Disclosure to Associated Persons Signing or Acknowledging Form U4) and
8313 (Release of Disciplinary Complaints, Decisions and Other
Information) to the list of rules that are applicable to transactions
in, and business activities relating to, exempted securities, including
government securities.
FINRA recognizes that accurate and complete reporting in the CRD
system is an important component of investor protection, and FINRA
Rules 2080 and 2081, which have general applicability to all FINRA
members, further this purpose.
FINRA Rule 2080 addresses the expungement of customer dispute
information from the CRD system and provides that a court of competent
jurisdiction must order or confirm all expungement directives before
FINRA will expunge customer dispute information from the CRD system.
The rule also requires that FINRA members or associated persons name
FINRA as an additional party in any court proceeding in which they seek
an order to expunge customer dispute information or request
confirmation of an award containing an order of expungement, unless the
requirement is waived in accordance with the rule.
FINRA Rule 2081 prohibits members and associated persons from
conditioning or seeking to condition settlement of a dispute with a
customer on, or to otherwise compensate the customer for, the
customer's agreement to consent to, or not to oppose, the firm's or
associated person's request to expunge such customer dispute
information from the CRD system.
FINRA Rule 2263 requires members to provide each associated person,
whenever the associated person is asked to sign a new or amended Form
U4, with certain written disclosures regarding the nature and process
of arbitration proceedings. This rule ensures that associated persons
of all members understand that the Form U4 contains a predispute
arbitration clause and that by signing the Form U4, the associated
persons are agreeing to be bound by the arbitration proceedings. The
rule applies generally to all members and associated persons.
FINRA Rule 8313 governs FINRA's release of disciplinary and other
information to the public. The rule is applicable to all members,
irrespective of business model or client base.
Trade Reporting and Operational Rules
FINRA is also proposing to amend FINRA Rule 0150(c) to add several
trade reporting and operational rules that have general application to
the conduct of members. Specifically, the proposed rule change would
add the following rules to FINRA Rule 0150(c):
FINRA Rule 4370 (Business Continuity Plans and Emergency
Contact Information) (requires a member to create, maintain, review at
least annually and update upon any material change, a written business
continuity plan identifying procedures relating to an emergency or
significant business disruption and enumerates the minimum elements
that a member's business continuity plan must address, to the extent
those elements are applicable and necessary to the firm's business);
FINRA Rule 4380 (Mandatory Participation in FINRA BC/DR
Testing Under Regulation SCI) (authorizes FINRA to designate firms that
are subject to mandatory participation in business continuity and
disaster recovery (BC/DR) testing under
[[Page 62145]]
Regulation SCI, which will be conducted once per year);
FINRA Rule 4590 (Synchronization of Member Business
Clocks) (requires that firms synchronize their business clocks that are
used for purposes of recording the date and time of any event that must
be recorded pursuant to the FINRA By-Laws or other FINRA rules (e.g.,
the time a trade was executed or the time an order was received or
routed), with reference to a time source as designated by FINRA); \38\
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\38\ Rule 4590 applies to members' business clocks that are used
for purposes of recording the date and time of any event that must
be recorded pursuant to the FINRA By-Laws or other FINRA rules. As
specified in Rule 6730(e)(8), an ``Auction Transaction'' in a U.S.
Treasury Security, as defined under FINRA rules, shall not be
reported to FINRA. Accordingly, the application of Rule 4590 to
exempted securities does not cover auction transactions in U.S.
Treasury securities, and it does not alter members' obligations to
comply with any clock synchronization requirements otherwise
applicable to U.S. Treasury securities auctions.
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FINRA Rule 7730 (Trade Reporting and Compliance Engine
(TRACE)) (sets forth the TRACE transaction reporting fees and the TRACE
data products offered by FINRA and the fees associated with those
products); \39\ and
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\39\ FINRA notes, however, that Rule 7730(b), by its terms,
currently excludes transactions in U.S. Treasury Securities, as
defined under FINRA rules, from the TRACE transaction reporting
fees. See Securities Exchange Act Release No. 79116, (October 18,
2016), 81 FR 73167, 73169 (October 24, 2016) (Order Approving File
No. SR-FINRA-2016-027). See also supra note 21.
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FINRA Rule 8211 (Automated Submission of Trading Data
Requested by FINRA) (requires members to submit specified trade data in
automated format as may be prescribed by FINRA).
Other Rules
Finally, FINRA is proposing to amend FINRA Rule 0150(c) to add
other rules that relate to customer protection and have general
applicability to the conduct of members and associated persons or that
are applicable to exempted securities, including government securities.
These other rules are:
FINRA Rule 2030 (Engaging in Distribution and Solicitation
Activities with Government Entities) (regulates members engaging in
distribution or solicitation activities with government entities on
behalf of investment advisers); \40\
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\40\ FINRA Rule 2030 is modeled after Rule 206(4)-5 under the
Investment Advisers Act of 1940 (``SEC Pay-to-Play Rule'') that
addresses pay-to-play practices by investment advisers. See
Securities Exchange Act Release No. 78683 (August 25, 2016), 81 FR
60051 (August 31, 2016) (Order Approving File No. SR-FINRA-2015-056)
(``Approval Order''); see also Investment Advisers Act Release No.
4532 (September 20, 2016), 81 FR 66526 (September 28, 2016) (finding
that Rule 2030 imposes substantially equivalent or more stringent
restrictions on members than the SEC Pay-to-Play Rule imposes on
investment advisers and is consistent with the objectives of the SEC
Pay-to-Play Rule). Neither the SEC Pay-to-Play Rule nor FINRA's Rule
2030 exclude specific products, see Approval Order, 81 FR 60051,
60058-59. In addition, both the SEC Pay-to-Play Rule and FINRA Rule
2030 define the term ``government entity'' to mean any state or
political subdivision of a state, including their agencies,
authorities and instrumentalities, a pool of assets sponsored or
established by the state or political subdivision or any agency,
authority or instrumentality thereof, or a plan or program of such
government entity. See 17 CFR 275.206(4)-5(f)(5); FINRA Rule
2030(g)(6).
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FINRA Rule 2040 (Payments to Unregistered Persons)
(governs the payment of transaction-based compensation by members to
unregistered persons, including retired representatives and foreign
finders);
FINRA Rule 2070 (Transactions Involving FINRA Employees)
(addresses conflicts of interests involving FINRA employees and plays a
vital role in helping FINRA monitor whether employees are abiding by
trading restrictions imposed by the FINRA Code of Conduct);
FINRA Rule 2090 (Know Your Customer) (requires members to
use reasonable diligence in regard to the opening and maintenance of
every account, in order to know and retain the essential facts
concerning every customer to effectively service customer accounts, act
in accordance with any special handling instructions, understand the
authority of each person acting on behalf of customers, and comply with
applicable laws, regulations and rules);
FINRA Rule 2130 (Approval Procedures for Day-Trading
Accounts) (requires firms that promote day-trading strategies, directly
or indirectly, to deliver the risk disclosure statement set forth in
FINRA Rule 2270 (Day-Trading Risk Disclosure Statement), to a non-
institutional customer prior to opening the account for the customer,
and to (1) approve the customer's account for day-trading in accordance
with procedures set forth in the rule or (2) obtain a written agreement
from the customer stating that the customer does not intend to use the
account for day-trading activities);
FINRA Rule 2140 (Interfering With the Transfer of Customer
Accounts in the Context of Employment Disputes) (prohibits members or
associated persons from interfering with a customer's request to
transfer his or her account in connection with the change in employment
of the customer's registered representative, provided that the account
is not subject to any lien for monies owed by the customer or other
bona fide claim);
FINRA Rule 2165 (Financial Exploitation of Specified
Adults) (permits members to place temporary holds on disbursements of
funds or securities from the accounts of specified customers where
there is a reasonable belief of financial exploitation of such
customers);
FINRA Rule 2213 (Requirements for the Use of Bond Mutual
Fund Volatility Ratings) (imposes conditions and disclosure
requirements on a firm that distributes a retail communication that
includes a ``bond mutual fund volatility rating,'' including that the
rating must be based on objective factors, such as the credit quality
of the fund's individual portfolio holdings, the market price
volatility of the portfolio, the fund's performance, and specific
risks, such as interest rate risk, prepayment risk and currency risk);
FINRA Rule 2214 (Requirements for the Use of Investment
Analysis Tools) (provides a limited exception to the general
prohibition on members' communications that predict or project
performance, as set forth in paragraph (d)(1)(F) of FINRA Rule 2210
(Communications with the Public), for investment analysis tools,
provided that specified conditions are met);
FINRA Rule 2216 (Communications with the Public About
Collateralized Mortgage Obligations (``CMOs'')) (sets forth standards
applicable to retail communications concerning CMOs);
FINRA Rule 2220 (Options Communications) (sets forth a
member's obligations with respect to its options communications with
the public); \41\
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\41\ At the time of the 1996 Approval Order, FINRA Rule 2220
required that firms designate a specific individual as a Compliance
Registered Options Principal with responsibility for approving
certain options communications. The rule has changed since that
time, eliminating this operational condition, and currently requires
that, among other things, a designated Registered Options
Principal(s) review and approve all retail communications, which
would allow more than one individual to review and approve such
communications. Moreover, all firms that are engaged in, or intend
to engage in, transactions in options with the public must have at
least one Registered Options Principal pursuant to FINRA Rule
1220(a)(8) (Registered Options Principal). FINRA believes that the
requirements relating to options on government securities should be
consistent, to the extent applicable, with the requirements for
options covered by FINRA Rule 2360 (Options).
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FINRA Rule 2267 (Investor Education and Protection)
(requires members to provide customers at least once every calendar
year in writing (which may be electronic) with: (1) FINRA's website
address; (2) the BrokerCheck hotline number; and (3) a statement
regarding the availability of an investor brochure that includes
information describing BrokerCheck);
[[Page 62146]]
FINRA Rule 2270 (Day-Trading Risk Disclosure Statement)
(requires firms that promote day-trading strategies, directly or
indirectly, to deliver the risk disclosure statement set forth in the
rule to a non-institutional customer prior to opening the account for
the customer);
FINRA Rule 2272 (Sales and Offers of Sales of Securities
on Military Installations) (governs sales and offers of sales of
securities by members on the premises of any military installation to
members of the Armed Forces of the United States or their dependents);
\42\
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\42\ Rule 2272 requires, among other things, a member 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 his
or her dependents to provide a clear and conspicuous disclosure with
the identity of the member offering the securities and stating that
the securities are not being offered or provided by the member of
behalf of the Federal Government, and that the offer of such
securities is not sanctioned, recommended or encouraged by the
Federal Government. See Rule 2272(b). The rule applies to all
members seeking to engage in sales or offers of sales of securities,
irrespective of the type of securities offered. While some exempted
securities are issued by the U.S. Federal Government (e.g., U.S.
Treasury securities), other exempted securities (e.g., group
variable contracts) are not.
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FINRA Rule 2273 (Educational Communication Related to
Recruitment Practices and Account Transfers) (provides that a member
that hires or associates with a registered representative must furnish
to a former customer of the representative, individually (in paper or
electronic form) required educational communication when: (1) the
member, directly or through a representative, individually contacts a
former customer of that representative to transfer assets; or (2) a
former customer of the representative, absent individual contact,
transfers assets to an account assigned, or to be assigned, to the
representative at the member); and
FINRA Rule 2360 (Options) (addresses specific risks that
pertain to options, and implements provisions of the federal securities
laws and SEC rules, including, among other things, provisions requiring
specific disclosure documents, additional diligence in approving the
opening of accounts, and specific requirements for confirmations,
account statements, suitability, recordkeeping and reporting).\43\
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\43\ See supra note 41.
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Capital Acquisition Broker Rules
The CAB Rules are a separate set of FINRA rules for firms that meet
the definition of a ``capital acquisition broker'' and that elect to be
governed under this rule set. CABs are members that engage in a limited
range of activities, essentially advising companies and private equity
funds on capital raising and corporate restructuring, and acting as
placement agents for sales of unregistered securities to institutional
investors under limited conditions. Members that elect to be governed
under the CAB rule set are not permitted, among other things, to carry
or maintain customer accounts, handle customers' funds or securities,
accept customers' trading orders, or engage in proprietary trading or
market-making.\44\
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\44\ See CAB Rule 016(c).
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CAB Rule 015 states that FINRA Rule 0150 shall apply to the CAB
Rules. FINRA proposes to amend CAB Rule 015 to more closely track the
text of FINRA Rule 0150, and to be consistent with the revisions to
FINRA Rule 0150 made pursuant to this rule filing.
Proposed CAB Rule 015(a), which defines the terms ``exempted
securities'' and ``municipal securities,'' is exactly the same as FINRA
Rule 0150(a). Similar to FINRA Rule 0150(b), proposed CAB Rule 015(b)
provides that the CAB Rules are not intended to be, and shall not be
construed as, rules concerning transactions in municipal securities.
Proposed CAB Rule 015(c) resembles FINRA Rule 0150(c), but refers
to the CAB Rules that apply to transactions in, and business activities
related to, exempted securities, except municipal securities, conducted
by CABs and their associated persons, rather than to FINRA Rules. In
this regard, FINRA proposes to apply all CAB Rules, other than CAB
Rules 512 (Private Placements of Securities Issued by Members) and 515
(Fairness Opinions), to such transactions and activities, because
either the CAB Rule provides that all CABs are subject to a FINRA Rule
included in FINRA Rule 0150(c), or the CAB Rule has provisions that are
similar to those in FINRA Rules included in FINRA Rule 0150(c). FINRA
does not propose to apply CAB Rules 512 and 515 to such activities and
transactions, because those rules provide that CABs are subject to
FINRA Rules 5122 and 5150, respectively, which are not included in
FINRA Rule 0150(c).
Proposed CAB Rule 015(d) provides that nothing in this Rule shall
be deemed to expand or otherwise alter the scope of activities
permitted for CABs under CAB Rule 016(c) (the definition of ``capital
acquisition broker''). The purpose of this provision is to make clear
that CAB Rule 015 is not intended to define the scope of activities in
which CABs may engage. Instead, CAB Rule 016(c) defines what activities
in which a CAB may engage.
FINRA has filed the proposed rule change for immediate
effectiveness. The implementation date will be 270 days after the date
of the filing.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\45\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
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\45\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. As stated above, the proposed
rule change does not impact the current status of any of the listed
rules, but serves to modernize FINRA Rule 0150 to include rules of
general applicability to all FINRA members.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \46\ and Rule 19b-
4(f)(6) thereunder.\47\
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\46\ 15 U.S.C. 78s(b)(3)(A).
\47\ 17 CFR 240.19b-4(f)(6).
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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.
[[Page 62147]]
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:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2022-028 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2022-028. 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 website (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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the principal office of FINRA. All comments received will be
posted without change. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
FINRA-2022-028 and should be submitted on or before November 3, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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\48\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2022-22174 Filed 10-12-22; 8:45 am]
BILLING CODE 8011-01-P
