[Federal Register: December 29, 2009 (Volume 74, Number 248)]
[Notices]
[Page 68889-68893]
[DOCID:fr29de09-138]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61211; File No. SR-FINRA-2009-087]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Repeal
NASD Rules 2760 and 2780, Incorporated NYSE Rules 2B and 411, and the
Interpretation to Incorporated NYSE Rule 411(a)(ii)(5) as Part of the
Process of Developing the Consolidated FINRA Rulebook

December 18, 2009.
    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 December 4, 2009, 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. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    FINRA is proposing to repeal NASD Rule 2760 (Offerings ``At the
Market''), NASD Rule 2780 (Solicitation of Purchases on an Exchange to
Facilitate a Distribution of Securities), Incorporated NYSE Rule 2B (No
Affiliation between Exchange and any Member Organization), Incorporated
NYSE Rule 411 (Erroneous Reports) and the Interpretation to
Incorporated NYSE Rule 411(a)(ii)(5) as part of the process of
developing a consolidated FINRA rulebook.
    The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, at the principal office of FINRA 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, 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
    As part of the process of developing a new consolidated rulebook
(``Consolidated FINRA Rulebook''),\3\ FINRA is proposing to repeal NASD
Rule 2760 (Offerings ``At the Market''), NASD Rule 2780 (Solicitation
of Purchases on an Exchange to Facilitate a Distribution of
Securities), Incorporated NYSE Rule 2B (No Affiliation between Exchange
and any Member Organization), Incorporated NYSE Rule 411 (Erroneous
Reports) and the Interpretation to Incorporated NYSE Rule
411(a)(ii)(5).\4\ The proposed rule change is described in detail
below. NASD Rule 2760 (Offerings ``At the Market'')
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    \3\ The current FINRA rulebook consists of (1) FINRA Rules; (2)
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated
NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules
are referred to as the ``Transitional Rulebook''). While the NASD
Rules generally apply to all FINRA members, the Incorporated NYSE
Rules apply only to those members of FINRA that are also members of
the NYSE (``Dual Members''). The FINRA Rules apply to all FINRA
members, unless such rules have a more limited application by their
terms. For more information about the rulebook consolidation
process, see Information Notice, March 12, 2008 (Rulebook
Consolidation Process).
    \4\ For convenience, Incorporated NYSE Rules generally are
referred to as NYSE Rules.
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    NASD Rule 2760 provides that a member who is participating or who
is otherwise financially interested in the primary or secondary
distribution of any security which is not admitted to trading on a
national securities exchange shall make no representation that such
security is being offered to a customer ``at the market'' or at a price
related to the market price, unless the member knows or has reasonable
grounds to believe that a market for such security exists other than
that made, created, or controlled by the member, or by any person for
whom he is acting or with whom he is associated in such distribution,
or by any person controlled by, controlling or under common control
with the member.
    When Rule 2760 was adopted,\5\ its requirements duplicated those
set forth in the SEC's early version of SEA Rule 15c1-8 (designated at
the time of its adoption as Rule MC8).\6\ Today, SEA Rule 15c1-8 is
identical to its predecessor Rule MC8 except that it also applies to
municipal securities dealers.\7\ NASD Rule 2760 remains unchanged since
its inception.
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    \5\ Rule 2760, formerly designated as Section 16 in Article III
of the Rules of Fair Practice, was adopted in 1939 as part of
FINRA's original rulebook. See Certificate of Incorporation and By-
Laws, Rules of Fair Practice and Code of Procedure for Handling
Trade Practice Complaints of National Association of Securities
Dealers, Inc. (August 8, 1939).
    \6\ See Securities Exchange Act Release No. 1330 (August 4,
1937).
    \7\ See Securities Exchange Act Release No. 12468 (May 20,
1976), 41 FR 22820 (June 7, 1976) (Regulation of Municipal
Securities Professionals and Transactions in Municipal Securities).
FINRA Rule 0150(b) (Application of Rules to Exempted Securities
Except Municipal Securities) provides that FINRA's rules do not
apply to transactions in, and business activities relating to,
municipal securities.
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    FINRA is proposing to delete NASD Rule 2760 from the FINRA rulebook
because it duplicates SEA Rule 15c1-8. SEA Rule 15c1-8 explicitly makes
it a manipulative, deceptive, or other fraudulent device or contrivance
under Section 15(c) of the Exchange Act for a broker or dealer or
municipal securities dealer who is participating or otherwise
financially interested in the primary or secondary distribution of any
security which is not admitted to trading on a national securities
exchange to make a representation to a customer that a security is
being offered ``at the market'' unless certain conditions (identical to
those required by NASD Rule 2760) are satisfied. FINRA believes the SEA
rule appropriately protects investors without duplication by NASD Rule
2760. Therefore, FINRA considers the transfer of NASD Rule 2760 to the
Consolidated FINRA Rulebook to be unnecessary.
NASD Rule 2780 (Solicitation of Purchases on an Exchange to Facilitate
a Distribution of Securities)
    NASD Rule 2780 became effective in 1939, and its text has not been
changed since its adoption. The rule essentially incorporated verbatim
into the NASD rulebook SEA Rule 10b-2 (formerly Rule GB2), which was
adopted by the SEC in 1937 to ``eliminate the practice of stimulating
exchange activity in securities which are the subject of
distribution.'' \8\
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    \8\ See Securities Exchange Act Release No. 1330 (August 4,
1937).
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    The rule prohibits a member that participates or is otherwise
financially interested in a primary or secondary distribution of a
security from paying or offering to pay compensation to another person
for soliciting a purchase of any security of the issuer on a national
securities exchange or for purchasing any such security for an account
other than that of the member. The rule further prohibits a member from
(1) selling or offering to sell or deliver such security where the
member engaged in the aforementioned prohibited conduct or (2) causing
the purchase or sale of such security by engaging in the prohibited
conduct. Finally, the rule does not apply to any salary paid by a
member to a person whose ordinary duties include the solicitation of
orders on a national securities exchange, as long as the salary
represents ordinary compensation and is not paid in whole or in part
for the inducement of a purchase or sale of the security that is
subject to the distribution of which the member is participating or
financially interested.
    The SEC rescinded SEA Rule 10b-2 in 1993 finding, among other
things, that it was duplicative of other provisions of the federal
securities laws that more effectively address manipulative practices.
More specifically, the SEC noted that the general antifraud provisions,
including Section 17(a) of the Securities Act and Sections 9(a), 10(b)
and 15(c) of the Exchange Act and

Rule 10b-5 thereunder proscribe manipulative practices effected on and
off exchanges, and had been found to apply to the practices covered by
SEA Rule 10b-2.\9\ The SEC also noted in particular that SEA Rule 10b-6
addressed the manipulative activity covered by SEA Rule 10b-2. SEA Rule
10b-6 was the predecessor to current Regulation M. That regulation,
among other things, prohibits underwriters, broker-dealers and other
distribution participants, during a restricted period prior to the
completion of their participation in a distribution of securities, from
directly or indirectly bidding for, purchasing, or attempting to induce
any person to bid for or purchase the offered security absent an
available exception. Regulation M is designed to prohibit activities
that could artificially influence the market for the offered security,
including for example, supporting an IPO price by creating the
perception of scarcity of IPO stock or creating the perception of
aftermarket demand. Thus, FINRA believes that the conduct covered by
Regulation M and NASD Rule 2780 are very similar.
    In considering the provisions of NASD Rule 2780 today, FINRA sees
no significant utility to the rule in light of the applicable federal
securities laws and FINRA Rules 2010 (Standards of Commercial Honor and
Principles of Trade) and 2020 (Use of Manipulative, Deceptive or Other
Fraudulent Devices). Because the manipulative conduct contemplated by
NASD Rule 2780 can be reached by Regulation M, the federal securities
laws referenced above and FINRA Rules 2010 and 2020, FINRA proposes
that the provisions of NASD Rule 2780 not be adopted into the
Consolidated FINRA Rulebook and be deleted. NYSE Rule 2B (No
Affiliation between Exchange and any Member Organization)
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    \9\ See Securities Exchange Act Release No. 32100 (April 2,
1993), 58 FR 18145 (April 8, 1993).
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    NYSE Rule 2B was adopted as part of the merger between the NYSE and
Archipelago Holdings, Inc. The rule provides that, without prior SEC
approval, the Exchange or any entity with which it is affiliated shall
not, directly or indirectly, acquire or maintain an ownership interest
in a member organization. In addition, the rule states that a member
organization shall not be or become an affiliate \10\ of the Exchange,
or an affiliate of any affiliate of the Exchange; provided, however,
that, if a director of an affiliate of a member organization serves as
a director of NYSE Euronext, this fact shall not cause such member
organization to be an affiliate of the Exchange, or an affiliate of an
affiliate of the Exchange. The rule further provides that nothing in
the rule shall prohibit a member organization from acquiring or holding
an equity interest in NYSE Euronext that is permitted by the ownership
limitations contained in the certificate of incorporation of NYSE
Euronext.\11\ There is no comparable NASD rule.
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    \10\ The rule provides that the term ``affiliate'' shall have
the meaning specified in SEA Rule 12b-2. See 17 CFR 240.12b-2.
    \11\ See Securities Exchange Act Release No. 55293 (February 14,
2007), 72 FR 8033 (February 22, 2007) (Approval Order; File No.
NYSE-2006-120) (Amendments to Rule 2B relating to the combination of
NYSE Group, Inc. and Euronext N.V.).
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    The rule was adopted to address concerns by the SEC regarding the
potential for unfair competition and conflicts of interest between an
exchange's self-regulatory obligations and its commercial interests
that could exist if an exchange were to otherwise become affiliated
with one of its members, as well as the potential for unfair
competitive advantage that the affiliated member could have by virtue
of informational or operational advantages, or the ability to receive
preferential treatment.\12\
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    \12\ See Securities Exchange Act Release No. 53382 (February 27,
2006), 71 FR 11251 (March 6, 2006) (Approval Order; File No. SR-
NYSE-2005-77).
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    The NYSE has subsequently amended its version of Rule 2B in
response to concerns by the SEC regarding certain other of its
affiliate relationships.\13\ FINRA did not make conforming amendments
to its version of Rule 2B since the NYSE's changes addressed specific
arrangements between the NYSE and its affiliates in its capacity as an
exchange.
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    \13\ See Securities Exchange Act Release No. 59011 (November 24,
2008), 73 FR 73360 (December 2, 2008) (Approval Order; File No. SR-
NYSE-2008-122). See also e.g., Securities Exchange Act Release No.
59281 (January 22, 2009), 74 FR 5014 (January 28, 2009) (Approval
Order; File No. SR-NYSE-2008-120).
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    FINRA is proposing to delete NYSE Rule 2B from the FINRA rulebook.
This rule specifically addresses relationships between the Exchange and
its affiliates. The SEC's concerns regarding potential conflicts of
interest and unfair competitive advantage in affiliate relationships
between an exchange and a member are not applicable to FINRA because it
does not operate as an exchange. As such, FINRA considers the transfer
of NYSE Rule 2B to the Consolidated FINRA Rulebook to be unnecessary.
NYSE Rule 411 (Erroneous Reports)
    NYSE Rule 411 addresses three separate issues. First, paragraph (a)
of the rule addresses situations where a member has rendered a report
that differs from the terms of an executed trade. Second, paragraph
(b)(1) sets forth a member's obligations when handling separate odd-lot
orders. Third, paragraph (b)(2) requires members to record securities
transactions in accounts no later than settlement date. Each of these
provisions is discussed separately below.
(1) NYSE Rule 411(a): Erroneous Reports
    NYSE Rule 411(a)(i) provides that the price and size of an ``actual
auction market trade'' are binding, notwithstanding that the customer
has received an erroneous report with respect to the terms of the
trade.\14\ Because some customers may not want corrected reports
offered by a member that has rendered an erroneous report, the rule
includes two alternative approaches in cases where the wrong price and/
or size has been reported to the customer.\15\ Under the first
alternative, the customer may take the actual terms of the auction
market trade, and the trade clears and settles in accordance with the
terms of the auction market trade. Under the second alternative, the
customer may treat the terms of the erroneous report as though they
were the terms of the actual auction market trade, provided certain
conditions are met, and the member may treat the erroneous report as an
erroneous trade, assuming any losses or paying any profit to the New
York Stock Exchange Foundation.\16\ NYSE Rule 411(a)(iii) provides that
a report is not binding and must be rescinded if an order was not
actually executed but was erroneously reported as having been executed.
An order that was executed, but was erroneously reported as not having
been executed, is binding. Finally, NYSE Rule 411(a)(iv) includes a
provision addressing erroneous reports by floor brokers involving ``not
held'' orders.
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    \14\ See NYSE Information Memo 01-38 (November 6, 2001).
    \15\ NYSE members and member organizations must always accept a
corrected report. See NYSE Information Memo 02-07 (February 5,
2002).
    \16\ The NYSE has adopted an Interpretation to paragraph
(a)(ii)(5) regarding the calculation of profits in these
circumstances. Although the interpretation relates to NYSE Rule
411(a)(ii)(5), this Interpretation appears in the Transitional
Rulebook and in NYSE's Rulebook under NYSE Rule 410. FINRA is
proposing to delete the Interpretation and not include it in the
Consolidated FINRA Rulebook.
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(2) NYSE Rule 411(b)(1): ``Bunching'' Odd-Lot Orders
    NYSE Rule 411(b)(1) includes two separate provisions regarding the

aggregation of multiple odd-lot orders. First, the rule prohibits a
member from combining orders given by different customers to buy or
sell odd-lots of the same stock into a round-lot order without the
prior approval of the customers. Second, the rule states that when a
customer ``gives, either for his own account, for various accounts in
which he has an actual monetary interest, or for accounts over which
such person is exercising investment discretion, buy or sell odd-lot
orders which aggregate 100 shares or more,'' the member may not accept
the orders unless they are, as far as possible, consolidated into round
lots, except that orders marked ``long'' need not be consolidated with
selling orders marked ``short.'' An exception from the consolidation
requirement is available once per trading day by a person exercising
investment discretion over multiple accounts if the odd-lot orders, in
the aggregate, total fewer than 300 shares.
(3) NYSE Rule 411(b)(2): Recording of Transactions in Accounts
    NYSE Rule 411(b)(2) requires that transactions in securities be
recorded in accounts no later than settlement date. The rule originally
was intended to ensure that interest was properly posted for each
transaction and required that transactions be recorded and interest be
computed as of settlement date.\17\ The NYSE amended the rule into its
current form in 1982 to remove the language regarding the calculation
of interest and to permit firms to record securities transactions at
any time prior to settlement date.\18\
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    \17\ See Securities Exchange Act Release No. 18644 (April 14,
1982), 47 FR 17701 (April 23, 1982) (Notice of Filing; File No. SR-
NYSE-82-7).
    \18\ See Securities Exchange Act Release No. 18778 (May 28,
1982), 47 FR 24900 (June 8, 1982) (Approval Order; File No. SR-NYSE-
82-7).
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    FINRA is proposing not to incorporate NYSE Rule 411 or the
Interpretation to NYSE Rule 411(a)(ii)(5) into the Consolidated FINRA
Rulebook. The provisions in the rule related to erroneous reports are
specific to the NYSE marketplace, and certain of the provisions relate
solely to transactions by floor brokers. Paragraph (b)(1), which is
related to the ``bunching'' of odd-lot orders, is similarly focused on
the NYSE marketplace, which maintains a separate system for the
execution of odd-lot orders.\19\ Because FINRA does not maintain a
marketplace, a rule addressing the aggregation of orders for execution
is unnecessary.\20\ Finally, FINRA is proposing that NYSE Rule
411(b)(2) not be included in the Consolidated FINRA Rulebook because
the rule is duplicative of existing SEC recordkeeping requirements and
longstanding SEC guidance.\21\
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    \19\ See NYSE Rule 124 (Odd-Lot Orders). FINRA did not
incorporate NYSE Rule 124 into the Transitional Rulebook because it
is solely concerned with the NYSE marketplace.
    \20\ Although FINRA does not have a rule addressing the bunching
of odd-lot orders, FINRA's trade reporting rules have separate
reporting requirements for round-lot and odd-lot transactions. In
addition, the aggregation of individual executions (both round-lot
and odd-lot executions) for trade reporting purposes is prohibited.
See, e.g., FINRA Rules 6282(f), 6380A(f), 6380B(h).
    \21\ See 17 CFR 240.17a-3(a)(3); see also Securities Exchange
Act Release No. 10756 (April 26, 1974) (``Transactions involving the
purchase and sale of securities should be posted to the customer's
ledger accounts * * * no later than settlement date.'').
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    FINRA will announce the implementation date of the proposed rule
change in a Regulatory Notice to be published no later than 90 days
following Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\22\ 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. FINRA believes that the proposed rule change would
streamline and improve FINRA's rulebook by eliminating rules that are
duplicative of federal rules and regulations and provisions that are
specific to the NYSE and its marketplace.
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    \22\ 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.

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

    Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule
change should be 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 (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number SR-FINRA-2009-087 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2009-087. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission,\23\ 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 inspection and copying 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 the
filing also will be available for inspection and copying at the
principal office of FINRA. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions. You should submit only

information that you wish to make available publicly. All submissions
should refer to File Number SR-FINRA-2009-087 and should be submitted
on or before January 19, 2010.
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    \23\ The text of the proposed rule change is available on the
Commission's Web site at http://www.sec.gov/.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-30784 Filed 12-28-09; 8:45 am]

BILLING CODE 8011-01-P