[Federal Register Volume 76, Number 89 (Monday, May 9, 2011)]
[Notices]
[Pages 26779-26787]
[FR Doc No: 2011-11190]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64386; File No. SR-FINRA-2011-018]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change and Amendment
No. 1 to Adopt NASD Rule 2830 as FINRA Rule 2341 (Investment Company
Securities) in the Consolidated FINRA Rulebook

May 3, 2011.
    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 April 19, 2011, Financial Industry Regulatory Authority, Inc.
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc.
(``NASD'')) filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by FINRA. On May 3, 2011,
FINRA filed Amendment No. 1. The Commission is publishing this notice
to solicit comments on the proposed rule change, as amended, 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 adopt NASD Rule 2830 (Investment Company
Securities) as FINRA Rule 2341 (Investment Company Securities) in the
consolidated FINRA rulebook with significant changes. 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 adopt NASD
Rule 2830 (Investment Company Securities) as FINRA Rule 2341
(Investment Company Securities) in the Consolidated FINRA Rulebook with
significant changes, as discussed below. NASD Rule 2830 regulates
members' activities in connection with the sale and distribution of
securities of companies registered under the Investment Company Act of
1940 (``investment company securities'').\4\
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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\ As with NASD Rule 2830, FINRA Rule 2341 would not regulate
members' activities in connection with variable insurance contracts,
which are regulated by FINRA Rule 2320 (Variable Contracts of an
Insurance Company).
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NASD Rule 2830
    In connection with the distribution and sale of investment company
securities, NASD Rule 2830 limits the sales charges members may
receive, prohibits directed brokerage arrangements, limits the payment
and receipt of cash and non-cash compensation, sets conditions on
discounts to dealers, and addresses other issues such as members'
purchases and sales of investment company securities as principal.
    Proposed FINRA Rule 2341 would revise the provisions of NASD Rule
2830 in four areas. First, Rule 2341 would require a member to make new
disclosures to investors regarding its receipt of or its entering into
an arrangement to receive, cash compensation. Second, Rule 2341 would
make a minor change to the recordkeeping requirements for non-cash
compensation. Third, Rule 2341 would eliminate a condition regarding
discounted sales of investment company securities to dealers. Fourth,
Rule 2341 would codify past FINRA staff interpretations regarding the
purchases and sales of exchange-traded funds (``ETFs''). These proposed
changes are discussed in more detail below.
Proposed Changes to the Cash Compensation Disclosure Requirements
    NASD Rule 2830(l) governs the payment and acceptance of cash and
non-cash compensation in connection with the sale of investment company
securities. Among other things, NASD Rule 2830(l)(4) prohibits members
from accepting cash compensation from an ``offeror'' (generally an
investment company and its affiliates) unless the compensation is
described in the fund's current prospectus. If a member enters into a
``special cash compensation'' arrangement with an offeror, and the
offeror does not make the arrangement available on the same terms to
all members that sell the fund's shares, the member's name and the
details of the arrangement must be disclosed in the prospectus.\5\
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    \5\ FINRA staff has interpreted this provision as permitting
disclosure in a fund's statement of additional information
(``SAI''). See Notice to Members 99-55 (July 1999) (Questions and
Answers Relating to Non-Cash Compensation Rules), Question
18.
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    The proposed rule change would modify the disclosure requirements
for cash compensation arrangements. As proposed, it would no longer
require disclosure of cash compensation arrangements in an investment
company's prospectus or SAI. Instead, if within the previous calendar
year a member received, or entered into an arrangement to receive, from
an offeror any cash compensation other than sales charges and service
fees disclosed in the prospectus fee tables of investment

companies sold by the member (``additional cash compensation''), the
member would have to make certain disclosures.\6\
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    \6\ The terms ``sales charge'' and ``service fees'' are defined
in NASD Rule 2830 and would retain the same definitions in FINRA
Rule 2341. ``Sales charge'' means ``all charges or fees that are
paid to finance sales or sales promotion expenses, including front-
end, deferred and asset-based sales charges, excluding charges and
fees for ministerial, recordkeeping or administrative activities and
investment management fees.'' See NASD Rule 2830(b)(8). ``Service
fees'' mean ``payments by an investment company for personal service
and/or the maintenance of shareholder accounts.'' See NASD Rule
2830(b)(9).
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    FINRA believes that the proposed amendments to the rule would
strengthen the rule's requirements regarding cash compensation
disclosure and would further inform investors of the potential
conflicts that can arise from the sale of investment company securities
when a member receives cash compensation other than sales charges and
service fees disclosed in the prospectus fee tables of such investment
companies.\7\ While the current rule prohibits members from selling
investment company shares unless certain information regarding cash
compensation arrangements is disclosed either in an investment
company's prospectus or SAI, it does not impose any disclosure
requirements on the member itself. Requiring disclosure of these
arrangements, in the detail described below, by the member would enable
investors to better evaluate whether a member's particular product
recommendation was influenced by these arrangements, and would be an
important adjunct to existing suitability, sales practice and
disclosure requirements.
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    \7\ FINRA further notes that, in October 2010, it published a
Regulatory Notice requesting comment on a concept proposal to
require members, at or prior to commencing a business relationship
with a retail customer, to provide a written statement to the
customer describing the types of accounts and services it provides,
as well as conflicts associated with such services and any
limitations on the duties the member otherwise owes to retail
customers. See Regulatory Notice 10-54 (October 2010) (Disclosure of
Services, Conflicts and Duties). FINRA staff conceives that the
document would include, in the case of investment company
securities, the information required by proposed FINRA Rule 2341,
but also would include disclosures more broadly as to financial or
other incentives, conflicts and limitations on duties, as described
in Regulatory Notice 10-54.
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    First, the member would have to prominently disclose that it has
received, or has entered into an arrangement to receive, cash
compensation from investment companies and their affiliates, in
addition to the sales charges and service fees disclosed in the
prospectus fee table. In this context, ``cash compensation'' would
include fees received from an offeror in return for services provided
to the offeror, such as sub-administrative and sub-transfer agency
fees. Second, the member would have to prominently disclose that this
additional cash compensation may influence the selection of investment
company securities that the member and its associated persons offer or
recommend to investors. Third, the member would have to provide a
prominent reference (or in the case of electronically delivered
documents, a hyperlink) to a web page or toll-free telephone number
where the investor could obtain additional information concerning these
arrangements.
    For new customers on or after the effective date of the proposed
rule change, the member would have to provide these disclosures in
paper or electronic form \8\ to each such customer prior to the time
that the customer first purchases shares of an investment company
through the member. For existing customers at the time the proposed
rule change becomes effective, the member would have to provide these
disclosures in paper or electronic form to each such customer by the
later of either: (a) 90 days after the effective date of the proposed
rule change, or (b) prior to the time the customer first purchases
shares of an investment company through the member after the effective
date (other than purchases through reinvestment of dividends or capital
distributions or through automatic investment plans).
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    \8\ See Notice to Members 98-3 (January 1998) (Electronic
Delivery of Information Between Members and Their Customers). This
Notice to Members provides that members may electronically transmit
documents that they are required or permitted to furnish to
customers under FINRA rules provided that the members adhere to
standards contained in 1995 and 1996 SEC Releases. See Securities
Act Release No. 7233 (October 6, 1995), 60 FR 53458 (October 13,
1995); Securities Act Release No. 7288 (May 9, 1996), 61 FR 24644
(May 15, 1996). The Notice to Members urges members to review these
SEC Releases in their entirety to ensure compliance with all aspects
of the SEC's electronic delivery requirements.
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    As discussed above, if a member has received, or entered into an
arrangement to receive, additional cash compensation, the member would
have to establish a web page or toll-free telephone number through
which a customer could obtain additional information concerning the
member's cash compensation arrangements. The web page or toll-free
telephone number would have to provide:
     A narrative description of the additional cash
compensation received from offerors, or to be received pursuant to an
arrangement entered into with an offeror, and any services provided, or
to be provided, by the member to the offeror or its affiliates for this
additional cash compensation;
     If applicable, a narrative description of any preferred
list of investment companies to be recommended to customers that the
member has adopted as a result of the receipt of additional cash
compensation, including the names of the investment companies on this
list; and
     The names of the offerors that have paid, or entered into
an arrangement with the member to pay, this additional cash
compensation to the member.
    The member would be required to update this information annually
within 90 days after the calendar year end. If this information becomes
materially inaccurate between annual updates, the member would have to
update it promptly. Also, if a customer specifically requests paper-
based disclosure of the information provided through a web page or
toll-free telephone number, the member would have to deliver this
information to the customer in paper form promptly.
    The proposal also would add supplementary material that would
clarify the definition of ``cash compensation,'' which would supersede
all prior guidance with respect to this definition.\9\ The
supplementary material would provide that ``cash compensation''
includes, among other things, revenue sharing paid in connection with
the sale and distribution of investment company securities.\10\ The
supplementary material would specify that ``cash compensation''
includes revenue sharing payments regardless of whether they are based
upon the amount of investment

company assets that a member's customers hold, the amount of investment
company securities that the member has sold, or any other amount if the
payment is related to the sale and distribution of the investment
company's securities. As cash compensation, members would be required
to disclose such revenue sharing arrangements.
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    \9\ See, e.g., Securities Exchange Act Release No. 37374 (June
26, 1996), 61 FR 35822 (July 8, 1996) (File No. SR-NASD-95-61;
Proposed Rule Change by NASD Relating to the Regulation of Cash and
Non-Cash Compensation In Connection With the Sale of Investment
Company Securities and Variable Contracts); Notice to Members 97-50
(August 1997) (NASD Regulation Requests Comment On Regulation Of
Payment And Receipt Of Cash Compensation Incentives) and Dep't. of
Enforcement v. Respondent, Decision No. E8A2003062001, June 28, 2007
(redacted decision) (noting administrative history of current rule).
    \10\ Revenue sharing payments can take many different forms. For
example, an offeror may make a year-end payment to a broker-dealer
based on the amount the broker-dealer's customers currently hold in
the offeror's funds, or based on the broker-dealer's total sales of
the offeror's funds in the previous year. Additionally, revenue
sharing payments can take the form of other cash payments, such as a
payment by an offeror to help pay the costs of a broker-dealer's
annual sales meeting. See, e.g., Securities Act Release No. 8358
(January 24, 2004) [sic], 69 FR 6438 (February 10, 2004)
(Confirmation Requirements and Point of Sale Disclosure Requirements
for Transactions in Certain Mutual Funds and Other Securities, and
Other Confirmation Requirement Amendments, and Amendments to the
Registration Form for Mutual Funds) at note 17.
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    These disclosure requirements would apply only to members that
receive or enter into an arrangement to receive additional cash
compensation from an offeror. Thus, if a member sells a mutual fund's
shares and receives only the sales load and distribution or service
fees described in the fund's prospectus fee tables, and does not
receive or enter into an arrangement to receive revenue sharing or
other additional cash compensation from an offeror, the member would
not be required to make the disclosures specified in proposed FINRA
Rule 2341(l)(4). Likewise, a principal underwriter of a no-load mutual
fund that sells shares directly to investors, and does not receive or
enter into an arrangement to receive any cash compensation beyond what
is described in the fund's prospectus fee table, would not be subject
to the disclosure requirements of paragraph (l)(4).
Proposed Changes to the Non-Cash Compensation Provisions
    NASD Rule 2830(l)(5) generally prohibits members and their
associated persons from accepting or making payments of non-cash
compensation in connection with the sale of investment company
securities, subject to certain exceptions. These exceptions allow gifts
of under $100, entertainment that does not raise questions of
propriety, certain training or education meetings, and sales contests
that do not favor particular products.
    NASD Rule 2830(l)(3) requires members to keep records of all
compensation received by the member or its associated persons from
offerors, other than small gifts and entertainment permitted by the
rule. Currently, this provision requires the records to include the
nature of, and ``if known,'' the value of any non-cash compensation
received. FINRA proposes to modify this requirement by deleting the
phrase ``if known'' regarding the value of non-cash compensation. This
change would make the provision more consistent with the non-cash
compensation recordkeeping requirements in other FINRA rules.\11\ The
proposal also would add supplementary material that would clarify that,
if a member or associated person receives non-cash compensation from an
offeror for which a receipt or other documentation of value is
unavailable, the member may estimate in good faith the value of such
compensation.
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    \11\ See recordkeeping requirements for non-cash compensation
accepted or paid in connection with the distribution or sale of
direct participation programs in FINRA Rule 2310(c)(2), variable
insurance contracts in FINRA Rule 2320(g)(3), and public offerings
of securities in FINRA Rule 5110(h)(2).
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Proposed Changes Regarding Conditions for Discounts to Dealers
    NASD Rule 2830(c) currently prohibits investment company
underwriters from selling the fund's shares to a broker-dealer at a
price other than the public offering price unless they meet two
requirements:
     The sale must be in conformance with NASD Rule 2420; and
     for certain investment company securities, a sales
agreement must be in place that sets forth the concessions paid to the
broker-dealer.
    The requirement that the sale be in conformance with NASD Rule 2420
is based on historical concerns that both underwriters and dealers of
investment company securities be FINRA members. Since the time this
provision was adopted, the laws governing broker-dealers have changed,
and today virtually all broker-dealers doing business with the public
are FINRA members. As a result of this change, the proposal would
eliminate the requirement that the sale be in conformance with NASD
Rule 2420.\12\
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    \12\ FINRA is proposing to replace NASD Rule 2420 with FINRA
Rule 2040. See Regulatory Notice 09-69 (December 2009) (Payments to
Unregistered Persons).
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Proposed Changes Regarding Sales of Shares of ETFs
    In recent years, members have bought and sold shares of ETFs, which
are open-end management investment companies or unit investment trusts
(``UITs'') that differ from traditional mutual funds and UITs, since
their shares typically are traded on securities exchanges. Because ETF
shares are sometimes traded at prices that differ from the fund's
current net asset value, ETFs can raise issues under both the
Investment Company Act and NASD Rule 2830. For example, Section 22(d)
of the Investment Company Act requires dealers to sell shares of an
open-end investment company at the current public offering price
described in the investment company's prospectus (i.e., the fund's net
asset value plus any applicable sales load). Similarly, NASD Rule
2830(i) generally prohibits members from purchasing fund shares at a
price lower than the bid price next quoted by or for the issuer (for
traditional mutual funds, this price is the fund's next quoted net
asset value).
    To address these issues, the SEC has issued a series of exemptive
orders that allow ETFs to trade on exchanges at prices that differ from
the fund's public offering price. The SEC also has proposed a rule that
generally would codify the exemptive relief provided by its orders.\13\
Similarly, FINRA staff has issued letters interpreting NASD Rule 2830
that allow members to purchase and sell shares of ETFs at prices other
than the current net asset value consistent with SEC exemptive
orders.\14\ The proposal would add a new paragraph, FINRA Rule 2341(o),
to codify earlier FINRA staff interpretive letters that permit the
trading of ETF shares at prices other than the current net asset value
consistent with applicable SEC rules or exemptive orders.
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    \13\ Securities Act Release No. 8901; Investment Company Act
Release No. 28193 (March 11, 2008), 73 FR 14618 (March 18, 2008)
(Exchange-Traded Funds (``ETFs'')).
    \14\ See, e.g., Letter from Joseph P. Savage, Counsel,
Investment Companies Regulation, NASD, to Kathleen H. Moriarty,
Esq., Carter, Ledyard & Milburn, dated October 30, 2002, available
at http://www.finra.org/Industry/Regulation/Guidance/InterpretiveLetters/P002680.
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Technical Changes
    Paragraph (b)(10) of NASD Rule 2830 incorporates by reference
several definitions under the Investment Company Act, including ``open-
end management investment company.'' The Investment Company Act does
not define the term ``open-end management investment company,'' but
does define ``management company,'' and divides this term into two sub-
classifications, ``open-end company'' and ``closed-end company.'' \15\
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    \15\ See Sections 4(3) and 5(a) of the Investment Company Act.
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    NASD Rule 2830 employs the terms ``open-end investment company''
and ``open-end management investment company,'' as well as the term
``closed-end investment company.'' These terms are intended to have the
same meanings as ``open-end company'' and ``closed-end company,''
respectively, under the Investment Company Act. Accordingly, paragraph
(b)(10) of proposed FINRA Rule 2341 incorporates the definitions of
``open-end company'' and ``closed-end company'' from the Investment
Company Act, rather than ``open-end management investment company.''
Likewise, references to these terms within NASD Rule 2830 have been
revised in proposed FINRA Rule 2341 to

refer to ``open-end companies'' and ``closed-end companies.''
    FINRA will announce the implementation date of the proposed rule
change no later than 90 days following Commission approval. The
implementation date will be no more than 365 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,\16\ 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 will help
ensure that investors are informed of potential conflicts of interest
that can arise from arrangements related to the sale and distribution
of investment company securities.
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    \16\ 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

    In June 2009, FINRA published Regulatory Notice 09-34 (the
``Notice'') requesting comment on the rule as proposed therein (the
``Notice proposal''). A copy of the Notice is attached as Exhibit 2a.
The comment period expired on August 3, 2009. FINRA received nine
comments in response to the Notice. A list of the commenters in
response to the Notice is attached as Exhibit 2b, and copies of the
comment letters received in response to the Notice are attached as
Exhibit 2c.\17\ A summary of the comments and FINRA's response is
provided below. Since almost all of the comments that FINRA received on
the proposal concerned its provisions governing receipt of cash
compensation, these comments and FINRA's responses thereto are further
categorized by subject matter.
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    \17\ See Exhibit 2b for a list of abbreviations assigned to
commenters. The Commission notes that these exhibits are part of the
filing which is available on FINRA's website.
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Proposal is Premature and Duplicative
    Several commenters argued that the proposal regarding cash
compensation is premature and duplicative given other legislative and
regulatory initiatives that deal with conflicts of interest that can
arise in the sale of shares of mutual funds. Schwab noted that the SEC
previously had proposed to require broker-dealers to disclose certain
conflicts of interest at the point of sale when offering investment
company securities.\18\ Schwab also cited legislation in Congress that,
among other things, would clarify the SEC's authority to promulgate
rules requiring that certain information be disclosed prior to the sale
of shares of a mutual fund.\19\ GWFS and Sutherland cited proposals by
the U.S. Department of Labor (``DOL'') under the Employee Retirement
Income Security Act of 1974, as amended (``ERISA'') to require broker-
dealers and other service providers to make certain disclosures
regarding conflicts of interest to employee benefit pension plans, and
proposed regulations to require the disclosure of plan and investment-
related information to participants and beneficiaries in participant-
directed individual account plans, such as 401(k) plans.\20\
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    \18\ See Securities Act Release No. 8358 (January 29, 2004), 69
FR 6438 (February 10, 2004) (Confirmation Requirements and Point of
Sale Disclosure Requirements for Transactions in Certain Mutual
Funds and Other Securities, and Other Confirmation Requirement
Amendments, and Amendments to the Registration Form for Mutual
Funds), and Securities Act Release No. 8544 (February 28, 2005), 70
FR 10521 (March 4, 2005) (reopening the comment period on proposed
rules, published in January 2004, that would require broker-dealers
to provide their customers with information regarding the costs and
conflicts of interest that arise from the distribution of mutual
fund shares, 529 college savings plan interests, and variable
insurance products).
    \19\ See Section 914 of the Investor Protection Act of 2009. See
U.S. Treasury press release of July 10, 2009, http://www.treas.gov/press/releases/tg189.htm. The Dodd-Frank Wall Street Reform and
Consumer Protection Act (``Dodd-Frank Act''), which was signed into
law in July 2010, included essentially the same provision cited by
Schwab. See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, Sec.  919 (2010).
    \20\ See Reasonable Contract or Arrangement under Section
408(b)(2)--Fee Disclosure, 72 FR 70988 (December 13, 2007)
(subsequently codified at 29 C.F.R. pt 2550) (``Reasonable Contract
Proposal''), and Fiduciary Requirements for Disclosure in
Participant-Directed Individual Account Plans, 73 FR 43014 (July 23,
2008) (subsequently codified at 29 C.F.R. pt 2550). The DOL adopted
the Reasonable Contract Proposal as an interim final rule, with
request for comments, in July 2010. See Reasonable Contract or
Arrangement Under Section 408(b)(2)--Fee Disclosure, 75 FR 41600
(July 16, 2010).
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    While FINRA is aware of the SEC and the DOL proposals and interim
final rule that may address similar issues, FINRA does not believe that
the cash compensation provisions are either premature or duplicative of
these other rules and rule proposals. The SEC's point-of-sale proposal
was initially published for comment in 2004, and re-published for
comment in 2005; since then, the SEC has not taken any action on this
proposal. Accordingly, FINRA believes that its proposal does not
interfere with any recent SEC rulemaking in this area. The DOL
proposals and interim final rule focus on disclosures required in
connection with the sale of shares of mutual funds to retirement plans
and their participants, rather than conflicts that can arise generally
when firms sell shares of mutual funds. FINRA believes that the cash
compensation provisions of proposed Rule 2341 will complement
information that the DOL requires broker-dealers to disclose to plan
sponsors and participants. Moreover, the DOL proposal would not cover
sales of shares of mutual funds outside of employee pension benefit
plans.
    Section 919 of the Dodd-Frank Act clarifies the SEC's authority to
issue rules that require broker-dealers to provide information to
retail investors before purchasing an investment product or service
from the broker-dealer.\21\ Notwithstanding this provision, FINRA
believes that it should proceed with its proposal. Section 919 is not
specific to mutual funds, nor does it require the SEC to adopt rules
similar to the cash compensation provisions of proposed FINRA Rule
2341. Moreover, FINRA believes its proposal is consistent with the
goals of the Dodd-Frank Act to provide greater information concerning
potential conflicts of interest to investors.
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    \21\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, Sec.  919 (2010).
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Proposed Disclosure Is Misleading to Investors
    Schwab, GWFS and SIFMA commented that the cash compensation
disclosure required by the Notice proposal would be misleading to
investors. Under the Notice proposal, members would have had to
disclose to investors, if applicable, that the firm receives cash
payments from an offeror other than sales charges or service fees
disclosed in the prospectus, the nature of any such cash payments
received in the past 12 months, and the name of each offeror that made
such payments listed in descending order based on the amount of
compensation received from the offeror. These commenters noted that the
dollar amounts received by a member would not provide meaningful
information to investors absent further

explanation, and that such amounts might not indicate that a cash
compensation arrangement with one offeror would present greater
conflicts than arrangements with other offerors.
    Given these concerns, as described in this proposed rule change,
FINRA has revised the Notice proposal to require what it believes is
more meaningful disclosure. As revised, the proposed rule change would
require a member to make certain disclosures to new customers in paper
or electronic form prior to the time that the customer first purchases
shares of an investment company through the member if, within the
previous calendar year, it had received or entered into an arrangement
to receive cash compensation from any offeror, in addition to sales
charges and service fees disclosed in the prospectuses of the funds it
sold. The proposed rule change would require that, for existing
customers, the member provide these disclosures in paper or electronic
form to each such customer by the later of either: (a) 90 days after
the effective date of the proposed rule change, or (b) prior to the
time the customer first purchases shares of an investment company
through the member after the effective date of the proposed rule change
(other than purchases through reinvestment of dividends or capital
distributions or through automatic investment plans).
    The member would have to: Prominently disclose that it receives (or
has entered into an arrangement to receive) cash compensation in
addition to sales charges and service fees disclosed in the prospectus;
prominently disclose that this additional cash compensation may
influence the selection of funds that the member and its associated
persons offer or recommend; and provide a prominent reference to a web
page or toll-free number that provides more information concerning
these arrangements. The web page or toll-free number would have to
provide a narrative description of the cash compensation the member
receives (or will receive), in addition to sales charges and service
fees described in the prospectus, and provide the names of offerors
that have paid (or will pay) this additional cash compensation. The web
page or toll-free number also would have to describe any services
provided or to be provided by the member to the offeror or its
affiliates for this additional cash compensation. If the member adopts
a preferred list of funds to be recommended to customers as a result of
the receipt of additional cash compensation, this fact and the names of
the funds on the list also would have to be provided.
    FINRA believes that, by providing shortened disclosure at the times
specified in the proposed rule, members would alert customers to these
potential conflicts of interest prior to the time that they decide
whether to buy investment company securities through the member. In
addition, customers would have the ability to learn more detail about
these cash compensation arrangements if they choose through the
provided web page or toll-free number. The narrative disclosure
provided on a member's web page or toll-free telephone number would
disclose these potential conflicts in a more comprehensive and
understandable manner. This disclosure would go beyond that proposed in
the Notice proposal in that it would require members to disclose any
arrangements to receive cash compensation in addition to the actual
receipt of such compensation. FINRA believes that members subject to
the rule's cash compensation disclosure requirements should provide the
specified disclosures regarding such arrangements irrespective of
whether they have received payment under the arrangement at the time of
disclosure. FINRA has eliminated the requirement proposed in the Notice
proposal to disclose the names of offerors in descending order based on
the amount of cash compensation received.
    GWFS commented that this disclosure only focuses on payments
related to sales of shares of mutual funds, while ignoring conflicts
that can arise in connection with the sale of other products, such as
collective investment funds or other investments. LPL similarly
expressed concern that the proposal discriminates against one product,
mutual funds, since it does not require disclosure of cash compensation
paid in connection with the sale of other products.
    These comments are outside the scope of the proposed rule change.
Proposed FINRA Rule 2341 and current NASD Rule 2830 by their terms only
apply to the sale of investment company securities. To the extent FINRA
should require similar disclosure in connection with the sale of other
securities, such requirements would have to be included in rules
governing the sale of these products.\22\
---------------------------------------------------------------------------

    \22\ See also Regulatory Notice 10-54 (Disclosure of Services,
Conflicts and Duties), discussed supra at note 6.
---------------------------------------------------------------------------

Opposition to Prospectus Level Disclosure
    The Notice proposal would have prohibited members from receiving
sales charges and service fees from an offeror unless such compensation
is described in the current prospectus for the offeror's investment
company. The Notice proposal also would have prohibited members from
entering into ``special sales charges or service fee arrangements''
that are not made available on the same terms to all members that
distribute the investment company securities of the offeror, unless the
name of the member and the details of the arrangement are disclosed in
the prospectus. The Notice proposal defined ``special sales charge or
service fee arrangement'' as ``an arrangement under which a member
receives greater sales charges or service fees than other members
selling the same investment company securities.'' The Notice proposal
then gave examples of such arrangements. The proposed prospectus
disclosure was in addition to requirements for members to disclose
details about cash compensation arrangements when an account is
opened.\23\
---------------------------------------------------------------------------

    \23\ See Regulatory Notice 09-34 (June 2009) (Investment Company
Securities).
---------------------------------------------------------------------------

    A number of commenters objected to the Notice proposal's prospectus
disclosure requirements. Commenters argued that members will not know
if the prospectus disclosure is accurate, since they will not be
parties to arrangements between a fund complex and other broker-
dealers.\24\ ICI noted that investment companies should not be required
to make these disclosures, since the information necessary for an
investor to make an informed decision about a member's conflicts of
interest resides with the member, not the investment company.
Commenters also argued that requiring disclosure in a prospectus in
addition to requiring a member to provide separate disclosure when an
account is opened is fragmented and confusing to investors.\25\ In
addition, commenters argued that the SEC, rather than FINRA, should
determine what information must be provided in an investment company
prospectus.\26\
---------------------------------------------------------------------------

    \24\ See comment letters from FSI, GWFS, LPL and SIFMA.
    \25\ See comment letters from SIFMA and USAA.
    \26\ See comment letters from LPL and SIFMA.
---------------------------------------------------------------------------

    Based on these concerns, FINRA has determined to eliminate the
prohibition on receiving cash compensation unless details regarding the
arrangement are disclosed in the offeror's investment company
prospectuses. As revised in this proposed rule change, the cash
compensation disclosures would have to be delivered prior to the time a
new customer first purchases investment

company securities through the member. The proposed rule change's
provisions provide separate requirements for delivery of these
disclosures to existing customers.
Burden on Members
    Schwab and USAA argued that the cash compensation proposal should
not be adopted because the burdens that the proposal imposes on members
are not justified given the benefits to investors. FINRA disagrees.
With respect to self-regulatory organization rulemaking, the
appropriate standard, as stated in the Act, is that the rules do not
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. Moreover, FINRA tailors its
proposed rule changes as narrowly as possible to achieve the intended
and necessary regulatory benefit. As stated in Item 4 of the proposed
rule change, 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. While FINRA
recognizes that the proposed rule change may impose some additional
burdens on members, FINRA continues to believe that such burdens are
necessitated by the benefits to investors in receiving greater
transparency as to the potential conflicts of interest that can arise
from arrangements related to the sale and distribution of investment
company securities.
    FSI and SIFMA objected to the Notice proposal's requirement to
update information contained on a member's web site or toll-free number
on a semi-annual basis, arguing that it would be unnecessarily costly
and provide little benefit over annual updating. FINRA believes it is
important for customers to receive current, accurate disclosures about
potential conflicts of interest related to the receipt of additional
cash compensation. Accordingly, while FINRA has modified the proposed
rule to require annual updating, it also believes that this information
should be updated promptly if it becomes materially inaccurate. Thus,
as modified, a member would be required to update the disclosures
describing additional cash compensation arrangements annually within 90
days after the calendar year end. If this information becomes
materially inaccurate between annual updates, it would have to be
updated promptly.\27\
---------------------------------------------------------------------------

    \27\ FINRA notes that this revised updating requirement closely
tracks the SEC's standards for updating the written disclosure
statement that investment advisers must provide to clients. See Form
ADV: General Instructions, Question 4.
---------------------------------------------------------------------------

    Schwab argued the requirement to determine whether a member has
received cash compensation other than the sales charges or service fees
disclosed in the prospectus is burdensome, particularly if a member
operates a mutual fund ``supermarket'' where payments may come from a
combination of Rule 12b-1 fees, sub-administrative fees and advisory
fees. FINRA disagrees. The sales charge and service fees amounts that
are paid to members must be clearly disclosed in an investment company
prospectus. If a member is or will be receiving cash compensation
beyond the amounts disclosed in the prospectus fee table, the member
must disclose information about these additional payments. FINRA
believes that information concerning the pecuniary inducements that may
create incentives for broker-dealers to offer or recommend particular
investment company securities should be available to investors when
making an investment decision and that the importance of this
transparency cannot be offset by the number of different investment
company securities that a member may choose to offer. If a member is
uncertain as to the character of the payments it is or will be
receiving, it should err on the side of disclosing the receipt or
expected receipt of these payments.
Requests for Clarification
    The Notice proposal would have required members to disclose the
details of any ``special sales charge or service fee arrangement'' that
was not made available on the same terms to all members that distribute
an offeror's investment company securities. Schwab, LPL and SIFMA
commented that ``special sales charge or service fee arrangement,'' as
defined in the Notice proposal, was unclear and confusing. The proposed
rule change no longer uses this term and has eliminated its definition.
    The Notice proposal would have required members that receive any
form of cash compensation other than sales charges or service fees
disclosed in the prospectus to disclose, among other things, that the
member receives ``cash payments'' from an offeror other than such sales
charges or service fees. FSI and SIFMA commented that the term ``cash
payments'' is unclear, since it is not defined in the proposal. FINRA
has revised this provision to use the defined term ``cash
compensation'' in lieu of ``cash payments.''
    In addition, the proposed rule change includes supplementary
information that provides guidance with respect to the definition of
``cash compensation.'' The guidance explains that ``cash compensation''
includes cash payments commonly known as ``revenue sharing'' which are
typically paid by the investment company's adviser or another affiliate
in connection with the distribution of investment company securities.
The guidance notes that ``cash compensation'' includes these payments
``whether they are based upon the amount of investment company assets
that a member's customers hold, the amount of investment company
securities that the member has sold, or any amount if the payment is
related to the sale and distribution of the investment company's
securities.'' \28\
---------------------------------------------------------------------------

    \28\ See proposed FINRA Rule 2341.01.
---------------------------------------------------------------------------

    The Notice stated that revenue sharing payments can take many
forms, including an offeror's helping to pay the costs of a firm's
annual sales meeting.\29\ FSI, LPL and SIFMA all observed that NASD
Rule 2830(l)(5)(E) (and proposed FINRA Rule 2341(l)(5)(E)) permit an
offeror to contribute money toward a non-cash compensation arrangement
between a member and its associated persons, provided that the
arrangement meets the criteria in NASD Rule 2830(l)(5)(D) (and proposed
FINRA Rule 2341(l)(5)(D)). This provision thus allows an offeror to
contribute toward a member's annual sales meeting, provided the sales
meeting is a permissible non-cash compensation arrangement, without
having to disclose this contribution. These commenters argued that such
contributions should not be treated as revenue sharing, given that the
industry does not consider such payments to be revenue sharing. SIFMA
also commented that the description of ``revenue sharing'' in the
Notice conflicts with an SEC definition of the term, citing an SEC
enforcement order.\30\
---------------------------------------------------------------------------

    \29\ See Regulatory Notice 09-34, at note 8.
    \30\ See In the Matter of OppenheimerFunds, Inc. and
OppenheimerFunds Distributor, Inc., Securities Exchange Act Release
No. 52420, 2005 SEC LEXIS 2350 (Sept. 14, 2005).
---------------------------------------------------------------------------

    The fact that the Rule, both currently and as proposed, permits an
offeror to contribute money toward a member's annual sales meeting
(assuming the meeting complies with the requirements for an internal
non-cash compensation arrangement) does not preclude the need for a
member to disclose these payments as cash compensation. FINRA believes
that such payments raise the same conflict-of-interest issues as other
forms of revenue sharing, and thus should be disclosed.
    FINRA also disagrees with SIFMA's assertion that its description of
revenue sharing is inconsistent with the SEC's past definitions of that
term. As far as FINRA is aware, the SEC has never defined the term
``revenue sharing'' in a

rule or proposed rule text. The definition cited by SIFMA is used
solely in the context of a settled enforcement action between the SEC
and a mutual fund investment adviser and its affiliated broker-dealer
distributor and, as such, should be considered exclusive to the facts
and circumstances discussed in that action. In fact, the SEC has stated
separately in the context of its mutual fund point-of-sale disclosure
proposal that revenue sharing ``may encompass multiple revenue
streams'' that ``not only pose potential conflicts of interest, but
also may have the indirect effect of reducing investors' returns by
increasing the distribution-related costs incurred by funds.'' \31\
Accordingly, FINRA believes that it is appropriate to require members
to disclose receipt of such payments.
---------------------------------------------------------------------------

    \31\ See Securities Act Release No. 8358 (January 24, 2004), 69
FR 6438 (February 10, 2004) (Confirmation Requirements and Point of
Sale Disclosure Requirements for Transactions in Certain Mutual
Funds and Other Securities, and Other Confirmation Requirement
Amendments, and Amendments to the Registration Form for Mutual
Funds), at notes 17 & 21.
---------------------------------------------------------------------------

    As discussed above, the proposed rule change requires the cash
compensation disclosures to be delivered prior to the time a new
customer first purchases shares of an investment company through the
member. The proposed rule change's provisions provide separate
requirements for delivery of these disclosures to existing customers.
GWFS expressed uncertainty as to whom FINRA considers to be a
``customer,'' particularly where the member sells investment company
securities to a retirement plan. FINRA intends that these disclosures
be made to the person with whom the member has a customer relationship.
If a member sells investment company securities to a retirement plan,
the disclosure should be made to the retirement plan sponsor.
    The Notice proposal would have required disclosure if a member had
received additional cash compensation ``within the previous 12
months.'' GWFS and LPL expressed uncertainty as to how this 12-month
period would be calculated (e.g., whether it would be a rolling period
or based on the calendar year). FINRA has clarified the proposed rule
change to require disclosure based on receiving or entering into an
arrangement to receive additional cash compensation within the previous
calendar year.
    ICI and SIFMA inquired whether the cash compensation provisions
would require disclosure of the receipt of payments for services, such
as sub-administrative or sub-transfer agency fees. The term ``cash
compensation'' is defined broadly to mean ``any discount, concession,
fee, service fee, commission, asset-based sales charge, loan, override
or cash employee benefit received in connection with the sale and
distribution of investment company securities.'' If a member is
receiving fees from an offeror for services, such as sub-administrative
or sub-transfer agency fees, in connection with the sale and
distribution of investment company securities, then proposed FINRA Rule
2341(l)(4)(A) would require the member to disclose the receipt of these
fees, since they fall within the definition of ``cash compensation.''
In addition, proposed FINRA Rule 2341(l)(4)(C) would require the member
to describe this additional cash compensation and the services provided
or to be provided by the member for this additional cash compensation.
    The Notice proposal would have required a member to disclose ``the
nature of any such cash payments received in the past 12 months.'' ICI
commented that it is not clear what ``the nature of any such payments''
means. Schwab and SIFMA recommended that the proposal instead require
firms to describe the nature of services they provide to offerors, and
the nature of the compensation received.
    Based in part on these comments, FINRA revised the cash
compensation disclosure provision in several respects. As described
above, as proposed, the rule change would require a member that
receives, or has entered into an arrangement to receive, cash
compensation in addition to sales charges or service fees described in
the prospectus within the previous calendar year, to disclose in paper
or electronic form to a new customer prior to the time that the
customer first purchases shares of an investment company through the
member the fact that it receives (or will receive) such compensation.
The member would also have to disclose that this additional cash
compensation may influence the selection of investment company
securities that the member and its associated persons offer or
recommend to investors. Further, the member would have to provide a
reference to a web page or toll-free telephone number through which a
customer could obtain more information concerning the member's cash
compensation arrangements. The proposed rule change would require that,
for existing customers, the member provide these disclosures in paper
or electronic form to each such customer by the later of either: (a) 90
days after the effective date of the proposed rule change, or (b) prior
to the time the customer first purchases shares of an investment
company through the member after the effective date of the proposed
rule change (other than purchases through reinvestment of dividends or
capital distributions or through automatic investment plans).
    The web page or toll-free number must provide a narrative
description of the additional cash compensation received from offerors
and any services provided by the member to the offeror or affiliates
for this additional compensation. Members will be allowed to use
narrative disclosure to explain these arrangements. FINRA believes
these revisions will make this provision clearer to members and will
provide more meaningful disclosure to investors than that proposed in
the Notice.
    SIFMA inquired how the cash compensation disclosure requirements
would apply in the situation in which an introducing broker-dealer and
clearing firm share fees paid by an offeror. Assuming the introducing
firm sold investment company securities to a customer, the introducing
firm would be responsible for disclosing any additional cash
compensation it receives from an offeror, even if it shares such
additional compensation with a clearing firm. In such a situation, the
clearing firm would not be required to make the disclosures under
proposed FINRA Rule 2341 to the customer.
    SIFMA and FSI also inquired as to the effect of the proposed
disclosures on guidance that FINRA previously provided in Notice to
Members 99-55, Question 15. In that guidance, FINRA addressed
a situation in which an offeror reimburses a registered
representative's prospecting trip expenses, such as travel, lodging and
meals related to meetings with customers, stating that the
reimbursement payment would have to be made through the member and
disclosed as cash compensation in accordance with NASD Rule 2830(l)(4).
Under the proposed rule change, FINRA would consider such payments from
an offeror to be additional cash compensation that must be disclosed in
accordance with proposed FINRA Rule 2341(l)(4).
Internet Disclosure
    In the Notice, FINRA requested comment on how the required
information should be disclosed to investors, particularly given the
availability of the Internet. In particular, FINRA asked whether
members should be permitted to deliver initial disclosure information
to customers electronically, unless a customer specifically requested
paper-based disclosure. Alternatively, FINRA asked whether the rule
should

allow firms to provide generalized disclosure to investors when an
account is opened regarding the receipt of cash compensation that
refers the investor to a Web site address or toll-free telephone number
that provides more information.
    FSI, GWFS, ICI, LPL and SIFMA all supported revising the proposal
to allow web-based disclosure, unless a customer specifically requests
paper-based disclosure. FINRA has revised the proposal to allow members
to utilize the Internet or a toll-free number to provide more detailed
information concerning cash compensation arrangements to investors.
FINRA has also specified that if a customer specifically requests
paper-based disclosure, the member must deliver this information to the
customer in paper form promptly.
Compliance Date
    Schwab commented that, if the proposal is adopted, FINRA should
give members at least 180 days following adoption to comply with its
requirements. FSI and LPL argued for at least 24 months' lead time
before requiring firms to comply with the proposal. As stated in Item 2
of the proposed rule change, 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. The implementation
date will be no later than 365 days following Commission approval. In
establishing the effective date, FINRA will take into account that
firms would need to modify their compliance systems in light of the new
required disclosures.
Other Compensation Disclosure Comments
    The Notice proposal would have required a member to disclose the
names of each offeror that paid additional cash compensation, listed in
descending order based on the amount of compensation received from each
offeror. FSI recommended that the proposal be revised to permit listing
offerors in alphabetical order instead. FINRA has revised this
provision to eliminate the requirement to list offerors in descending
order based on amounts of cash compensation received. As revised, the
proposed rule change does not require that offerors be listed in a
particular order, as long as the disclosure requirements are met.
    ICI recommended that the cash compensation provisions have a de
minimis threshold below which disclosure of cash compensation payments
would not be required. ICI suggested that, if cash compensation
payments from a single fund complex represent 1% or less of the
aggregate cash compensation received by a member, no disclosure should
be required. FINRA does not believe a de minimis disclosure threshold
is appropriate. Whether particular cash compensation payments create
potential conflicts of interest will depend on the surrounding facts
and circumstances, and investors should be provided with the
opportunity to evaluate the nature of any such conflicts. Accordingly,
FINRA believes the rule should require members to disclose any amount
of additional cash compensation received from an offeror.
    The Notice proposal included a paragraph (l)(4)(E) that provided
that the disclosure requirements of paragraph (l)(4)(B) of the Notice
proposal would not apply to cash compensation in the form of sales
charges and service fees disclosed in a fund's prospectus fee
table.\32\ ICI recommended that this paragraph be deleted as redundant
given that language in paragraph (l)(4)(B) already excluded this
compensation from the disclosure requirements. FINRA agrees and has
deleted this paragraph in the proposed rule change.
---------------------------------------------------------------------------

    \32\ The disclosure requirements of paragraph (l)(4)(B) of the
Notice proposal would now be set forth, as revised, in paragraph
(l)(4)(A).
---------------------------------------------------------------------------

    USAA argued that the cash compensation provisions should exclude
members that do not pay their registered representatives direct
commissions. FINRA disagrees, since cash compensation arrangements can
create potential conflicts of interest even in the absence of a
commission-based compensation system for registered representatives.
For example, a member may select investment companies to be included on
its preferred list based in part on cash compensation received from
offerors.
    Warner Norcross recommended that the cash compensation provisions
be revised to require disclosure at the point of sale of any cash
compensation not disclosed in the prospectus. It also recommended that
the rule prohibit recommended sales based on payouts and require
members to put the interests of customers first. FINRA believes that
the proposed rule's disclosure requirements strike a rational balance
between providing access to customers of important compensation
information that may in part underlie a broker-dealer's decision to
offer investment company securities and the efficient delivery of
services to customers. FINRA will continue to assess the best mode of
all disclosure to customers including assessing whether information
access or point of sale disclosure requirements result in greater
utilization of disclosure information. With respect to firms'
obligations regarding recommendations to customers, FINRA notes that
the SEC recently approved new FINRA Rule 2111 (Suitability), which sets
forth the basis for determining the suitability of a recommended
transaction or investment strategy involving a security or
securities.\33\
---------------------------------------------------------------------------

    \33\ See Regulatory Notice 11-02 (January 2011) (SEC Approves
Consolidated FINRA Rules Governing Know-Your-Customer and
Suitability Obligations). See also Securities Exchange Act Release
No. 63325 (November 17, 2010), 75 FR 71479 (November 23, 2010) (File
No. SR-FINRA-2010-039; Order Granting Accelerated Approval, As
Modified by Amendment, to Proposed Rule Change to Adopt FINRA Rules
2090 (Know Your Customer) and 2111 (Suitability) in the Consolidated
FINRA Rulebook); Securities Exchange Act Release No. 64260 (April 8,
2011), 76 FR 20759 (April 13, 2011) (File No. SR-FINRA-2011-016;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
to Delay the Implementation Date of FINRA Rule 2090 (Know Your
Customer) and FINRA Rule 2111 (Suitability)).
---------------------------------------------------------------------------

Non-Cash Compensation Provisions
    NASD Rule 2830(l)(3) requires members to keep records of all
compensation received by a member or its associated persons from
offerors, except for gifts and entertainment permitted by paragraphs
(l)(5)(A) and (l)(5)(B). The records must include the names of the
offerors, the names of the associated persons, the amount of cash, and
the nature and, if known, the value of non-cash compensation received.
The Notice proposed to eliminate the ``if known'' qualification for the
value of non-cash compensation received.
    Schwab, FSI and SIFMA all urged FINRA to add language to the non-
cash compensation provisions to expressly permit members to estimate
the value of goods and services received for which a receipt or other
documentation of value is unavailable. FINRA has added supplementary
material to the rule which would expressly permit a member to estimate
in good faith the value of non-cash compensation received when a
receipt or other documentation of value is unavailable.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 45 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 or disapprove 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-2011-018 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-2011-018. 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 website (http://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; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make publicly
available. All submissions should refer to File Number SR-FINRA-2011-
018 and should be submitted on or before May 31, 2011.

For the Commission, by the Division of Trading and Markets, pursuant
to delegated authority.\34\
---------------------------------------------------------------------------

    \34\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-11190 Filed 5-6-11; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register: August 29, 2008 (Volume 73, Number 169)]
[Proposed Rules]
[Page 50892-50894]
[DOCID:fr29au08-14]

=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA-2008-0750; Directorate Identifier 2008-NE-21-AD]
RIN 2120-AA64

Airworthiness Directives; Dowty Propellers R175/4-30; R184/4-30-
4; R193/4-30-4; R.209/4-40-4.5; R212/4-30-4; R.245/4-40-4.5; R251/4-30-
4; R257/4-30-4; and R.259/4-40-4.5 Model Propellers

AGENCY: Federal Aviation Administration (FAA), Department of
Transportation (DOT).

ACTION: Notice of proposed rulemaking (NPRM).

-----------------------------------------------------------------------

SUMMARY: The FAA proposes to supersede an existing airworthiness
directive (AD) for all Dowty Rotol propellers. That AD currently
requires, for all Dowty Rotol propellers, visual inspections for
seizure and for cadmium plating of the blade pitch change operating
links and eyebolt fork assemblies. That AD also requires replacement or
heat-treatment of the blade pitch change operating links and eyebolt
fork assemblies, if necessary. This proposed AD would require the same
actions, but only for certain model Dowty Propellers. This proposed AD
results from the FAA determining that AD 70-16-02 does not apply to all
propellers, since current Dowty Rotol propellers are differently
designed. We are proposing this AD supersedure to specify the affected
propeller models, and to prevent seizure or embrittlement and cracking
of the blade pitch change operating links and eyebolt fork assemblies,
which could result in reduced controllability of the airplane.

DATES: We must receive any comments on this proposed AD by October 28,
2008.

ADDRESSES: Use one of the following addresses to comment on this
proposed AD.
     Federal eRulemaking Portal: Go to http://
www.regulations.gov and follow the instructions for sending your
comments electronically.
     Mail: Docket Management Facility, U.S. Department of
Transportation, 1200 New Jersey Avenue, SE., West Building Ground
Floor, Room W12-140, Washington, DC 20590-0001.
     Hand Delivery: Deliver to Mail address above between 9
a.m. and 5 p.m., Monday through Friday, except Federal holidays.
     Fax:<PHONE_NUMBER>.
    Contact Dowty Propellers, Anson Business Park, Cheltenham Road
East, Gloucester GL 29QN, UK; telephone: 44 (0) 1452 716000; fax: 44
(0) 1452 716001, for the service information identified in this
proposed AD.

FOR FURTHER INFORMATION CONTACT: Terry Fahr, Aerospace Engineer, Boston
Aircraft Certification Office, FAA, Engine and Propeller Directorate,
12 New England Executive Park, Burlington, MA 01803; e-mail:
<EMAIL_ADDRESS>telephone<PHONE_NUMBER>; fax<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

Comments Invited

    We invite you to send any written relevant data, views, or
arguments regarding this proposal. Send your comments to an address
listed under ADDRESSES. Include ``Docket No. FAA-2008-0750; Directorate
Identifier 2008-NE-21-AD'' in the subject line of your comments. We
specifically invite comments on the overall regulatory, economic,
environmental, and energy aspects of the proposed AD. We will consider
all comments received by the closing date and may amend the proposed AD
in light of those comments.
    We will post all comments we receive, without change, to http://
www.regulations.gov, including any personal information you provide. We
will also post a report summarizing each substantive verbal contact
with FAA personnel concerning this proposed AD. Using the search
function of the Web site, anyone can find and read the comments in any
of our dockets, including, if provided, the name of the individual who
sent the comment (or signed the comment on behalf of an association,
business, labor union, etc.). You may review the DOT's complete Privacy
Act Statement in the Federal Register published on April 11, 2000 (65
FR 19477-78).

Examining the AD Docket

    You may examine the AD docket on the Internet at http://
www.regulations.gov; or in person at the Docket Operations office
between 9 a.m. and 5 p.m., Monday through Friday, except Federal
holidays. The AD docket contains this proposed AD, the regulatory
evaluation, any comments

received, and other information. The street address for the Docket
Operations office (telephone<PHONE_NUMBER>) is the same as the Mail
address provided in the ADDRESSES section. Comments will be available
in the AD docket shortly after receipt.

Discussion

    The FAA proposes to amend 14 CFR part 39 by superseding AD 70-16-
02, Amendment 39-1503 (37 FR 16535, August 16, 1972). That AD requires,
for all Dowty Rotol propellers, visual inspections for seizure and for
cadmium plating of the blade pitch change operating links and eyebolt
fork assemblies. That AD also requires replacement or heat-treatment of
the blade pitch change operating links and eyebolt fork assemblies, if
necessary. That AD was the result of reports of incorrect and
unauthorized cadmium plating of propeller pitch change operating links,
link pins, and eyebolt fork assemblies on their case-hardened surfaces.
Those conditions, if not corrected, could result in seizure or
embrittlement and cracking of blade pitch change operating links and
eyebolt fork assemblies, which could result in reduced controllability
of the airplane.

Actions Since AD 70-16-02 Was Issued

    Since AD 70-16-02 was issued, we determined that at the time of
issuance, the applicability to all Dowty Rotol propellers was accurate.
However, other Dowty propeller models which are differently designed
have been type certificated since that AD was issued, and are not
affected by that AD. This proposed AD would clarify the propeller model
applicability by only affecting Dowty Propellers R175/4-30; R184/4-30-
4; R193/4-30-4; R.209/4-40-4.5; R212/4-30-4; R.245/4-40-4.5; R251/4-30-
4; R257/4-30-4; and R.259/4-40-4.5 model propellers. AD 70-16-02 has a
compliance time of within the next 100 hours time-in-service. This
proposed AD would require a compliance time of before further flight,
as the affected propellers should have already complied with AD 70-16-
02.

Relevant Service Information

    We have reviewed and approved the technical contents of Dowty Rotol
Service Bulletin (SB) No. 61-754, dated June 12, 1970. That SB
describes procedures for heat-treating the blade pitch change operating
links and eyebolt fork assemblies.

FAA's Determination and Requirements of the Proposed AD

    We have evaluated all pertinent information and identified an
unsafe condition that is likely to exist or develop on other products
of this same type design. For that reason, we are proposing this AD,
which would require visual inspections before further flight of the
blade pitch change operating links and eyebolt fork assemblies and
replacement or heat-treatment of them, if necessary, for Dowty
Propellers R175/4-30; R184/4-30-4; R193/4-30-4; R.209/4-40-4.5; R212/4-
30-4; R.245/4-40-4.5; R251/4-30-4; R257/4-30-4; and R.259/4-40-4.5
model propellers.

Costs of Compliance

    We anticipate that this proposed AD would affect no propellers
installed on airplanes of U.S. registry, as the affected propellers
should already be in compliance with AD 70-16-02 since it became
effective, on August 21, 1972. Based on this information, we estimate
the total cost of the proposed AD to U.S. operators to be $0.

Authority for This Rulemaking

    Title 49 of the United States Code specifies the FAA's authority to
issue rules on aviation safety. Subtitle I, Section 106, describes the
authority of the FAA Administrator. Subtitle VII, Aviation Programs,
describes in more detail the scope of the Agency's authority.
    We are issuing this rulemaking under the authority described in
Subtitle VII, Part A, Subpart III, Section 44701, ``General
requirements.'' Under that section, Congress charges the FAA with
promoting safe flight of civil aircraft in air commerce by prescribing
regulations for practices, methods, and procedures the Administrator
finds necessary for safety in air commerce. This regulation is within
the scope of that authority because it addresses an unsafe condition
that is likely to exist or develop on products identified in this
rulemaking action.

Regulatory Findings

    We have determined that this proposed AD would not have federalism
implications under Executive Order 13132. This proposed AD would not
have a substantial direct effect on the States, on the relationship
between the national Government and the States, or on the distribution
of power and responsibilities among the various levels of government.
    For the reasons discussed above, I certify that the proposed AD:
    1. Is not a ``significant regulatory action'' under Executive Order
12866;
    2. Is not a ``significant rule'' under the DOT Regulatory Policies
and Procedures (44 FR 11034, February 26, 1979); and
    3. Would not have a significant economic impact, positive or
negative, on a substantial number of small entities under the criteria
of the Regulatory Flexibility Act.
    We prepared a regulatory evaluation of the estimated costs to
comply with this proposed AD. See the ADDRESSES section for a location
to examine the regulatory evaluation.

List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Safety.

The Proposed Amendment

    Under the authority delegated to me by the Administrator, the
Federal Aviation Administration proposes to amend 14 CFR part 39 as
follows:

PART 39--AIRWORTHINESS DIRECTIVES

    1. The authority citation for part 39 continues to read as follows:

    Authority: 49 U.S.C. 106(g), 40113, 44701.

Sec.  39.13  [Amended]

    2. The FAA amends Sec.  39.13 by removing Amendment 39-1503 (37 FR
16535, August 16, 1972) and by adding a new airworthiness directive to
read as follows:

Dowty Propellers (Formerly Dowty Aerospace; Dowty Rotol Limited; and
Dowty Rotol): Docket No. FAA-2008-0750; Directorate Identifier 2008-
NE-21-AD.

Comments Due Date

    (a) The Federal Aviation Administration (FAA) must receive
comments on this airworthiness directive (AD) action by October 28,
2008.

Affected ADs

    (b) This AD supersedes AD 70-16-02, Amendment 39-1503.

Applicability

    (c) This AD applies to Dowty Propellers R175/4-30; R184/4-30-4;
R193/4-30-4; R.209/4-40-4.5; R212/4-30-4; R.245/4-40-4.5; R251/4-30-
4; R257/4-30-4; and R.259/4-40-4.5 model propellers. These
propellers are installed on, but not limited to, Fairchild F-27,
Fairchild-Hiller FH-227, Grumman G-159, Nihon YS-11, Convair 240,
340, 440, 600, and BAe HS 748 Series 2 airplanes.

Unsafe Condition

    (d) This AD results from the FAA determining that AD 70-16-02
does not apply to all propellers, since current Dowty Rotol
propellers are differently designed. We are issuing this AD
supersedure to specify the affected propeller models, and to prevent
seizure or embrittlement and cracking of the blade pitch change
operating links and eyebolt fork assemblies, which could result in
reduced controllability of the airplane.

Compliance

    (e) You are responsible for having the actions required by this
AD performed before further flight after the effective date of this
AD, unless the actions have already been done.
    (f) Inspect the blade pitch change operating link and eyebolt
fork assembly for:
    (1) Seizure (the link and eyebolt are seized if the torque
required to move the link is 300 inch pounds or more); and
    (2) Cadmium plating on the mating surfaces between the operating
link and eyebolt fork and the holes through the eyebolt fork and the
operating link.
    (g) If the link and eyebolt fork are not seized and have not
been cadmium plated, they may remain in service.
    (h) If the link and eyebolt fork are not seized but cadmium
plating is found in the prohibited areas, remove the plating by
means of wet or dry silicon carbide paper, fine or medium grade, and
conduct a magnetic crack test. If no cracks are found, the assembly
may remain in service until the next propeller overhaul for air
carrier airplanes and airplanes under a continuous maintenance
program or for 3,300 hours time-in-service after the effective date
of this AD for all other airplanes. At the next propeller overhaul
for air carrier airplanes and airplanes under a continuous
maintenance program, or within 3,300 hours time-in-service after the
effective date of this AD for all other airplanes, heat treat the
links and eyebolt forks found to have been cadmium plated, to remove
embrittlement. Use Dowty Rotol Service Bulletin No. 61-754, dated
June 12, 1970, to perform the heat treatment.
    (i) If the link and eyebolt fork are seized, remove the link and
eyebolt fork from service and replace them with an assembly having a
part number approved for that model propeller that has not been
cadmium plated in the prohibited areas.
    (j) If the link or eyebolt fork are found to be cracked during
the inspection in paragraph (h) of this AD, remove the cracked part
from service and replace it with a part having a part number
approved for that model propeller that has not been cadmium plated.
    (k) The inspection required by paragraph (f) of this AD need not
be performed and the propeller may remain in service if:
    (1) The operator can show that no cadmium plating exists in the
prohibited areas of that propeller; or
    (2) It is a new propeller that has never been overhauled.

Alternative Methods of Compliance

    (l) The Manager, Boston Aircraft Certification Office, FAA, has
the authority to approve alternative methods of compliance for this
AD if requested using the procedures found in 14 CFR 39.19.

Related Information

    (m) Contact Terry Fahr, Aerospace Engineer, Boston Aircraft
Certification Office, FAA, Engine and Propeller Directorate, 12 New
England Executive Park, Burlington, MA 01803; e-mail:
<EMAIL_ADDRESS>telephone<PHONE_NUMBER>; fax<PHONE_NUMBER>,
for more information about this AD.

    Issued in Burlington, Massachusetts, on August 22, 2008.
Carlos Pestana,
Acting Assistant Manager, Engine and Propeller Directorate, Aircraft
Certification Service.
[FR Doc. E8-20081 Filed 8-28-08; 8:45 am]

BILLING CODE 4910-13-P


[Federal Register: May 27, 2010 (Volume 75, Number 102)]
[Notices]
[Page 29787]
[DOCID:fr27my10-94]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62141; File No. SR-CBOE-2010-036]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Accelerated Approval of Proposed Rule
Change To Permit $1 Strikes for Options on Trust Issued Receipts

May 20, 2010.

I. Introduction

    On April 13, 2010, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to permit $1 strikes for options
on Trust Issued Receipts. The proposed rule change was published for
comment in the Federal Register on April 23, 2010.\3\ The Commission
received no comment letters on the proposal. This order approves the
proposed rule change on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 61935 (April 16, 2010),
75 FR 21373 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    CBOE has proposed to amend Rule 5.5, Series of Option Contracts
Open for Trading, by adding new Interpretation and Policy .17 that
would allow the Exchange to list options on the Trust Issued Receipts
(``TIRs''), including HOLding Company Depository ReceiptS (``HOLDRS''),
as defined under Interpretation and Policy .07 to Rule 5.3, in $1 or
greater strike price intervals, where the strike price is $200 or less
and $5 or greater where the strike price is greater than $200 (TIRs and
HOLDRS are hereafter collectively referred to as TIRs).\4\ The proposed
strike price intervals for options on TIRs are consistent with the
strike price intervals currently permitted for options on exchange-
traded funds (``ETFs'').\5\
---------------------------------------------------------------------------

    \4\ As more fully explained in the Notice, HOLDRS are a type of
TIR. Currently, the strike price intervals for options on TIRs are
as follows: (1) $2.50 or greater where the strike price is $25.00 or
less; (2) $5.00 or greater where the strike price is greater than
$25.00; and (3) $10.00 or greater where the strike price is greater
than $200. See CBOE Rule 5.5.01(c)-(e).
    \5\ See Interpretation and Policy .08 to Rule 5.5. See also
Securities Exchange Act Release No. 46507 (September 17, 2002), 67
FR 60266 (September 25, 2002) (permitting list of options on ETFs at
$1 strike price intervals) (SR-CBOE-2002-54).
---------------------------------------------------------------------------

    In support of its proposal, CBOE stated that it believes the
marketplace and investors will be expecting options on TIRs to trade in
a similar manner to options on ETFs because TIRs have characteristics
similar to ETFs.\6\ Accordingly, the Exchange asserts that the
rationale for permitting $1 strikes for ETF options equally applies to
permitting $1 strikes for options on TIRs and that investors will be
better served if $1 strike price intervals are available for options on
TIRs (where the strike price is less than $200).
---------------------------------------------------------------------------

    \6\ See Notice, supra note 3, for CBOE's explanation of how TIRS
are similar to ETFs.
---------------------------------------------------------------------------

    CBOE further stated that it has analyzed its capacity and
represents that it believes the Exchange and the Options Price
Reporting Authority have the necessary systems capacity to handle the
additional traffic associated with the listing and trading of $1
strikes (where the strike price is less than $200) for options on TIRs.

III. Discussion

    The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\7\
Specifically, the Commission finds that the proposal is consistent with
Section 6(b)(5) of the Act,\8\ which requires, among other things, that
the rules of a national securities exchange be designed to promote just
and equitable principles of trade, to remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \7\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission notes that the proposed strike price intervals for
options on TIRS are consistent with the strike price intervals
currently permitted for options on ETFs.\9\ Accordingly, the proposal
should provide consistency and predictability for investors who may
view these products as serving similar investment functions in the
marketplace to ETFs and may provide investors with greater flexibility
in achieving their investment objectives.
---------------------------------------------------------------------------

    \9\ See supra note 5.
---------------------------------------------------------------------------

    In addition, the Commission notes that CBOE has represented that it
believes the Exchange and the Options Price Reporting Authority CBOE
and the Options Price Reporting Authority have the necessary systems
capacity to handle the additional traffic associated with the listing
and trading of $1 strikes for options on TIRS.
    The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\10\ for approving the proposal prior to the thirtieth day
after the date of publication of the Notice in the Federal Register.
The Commission notes that it recently approved similar changes to
strike price intervals for options on Index-Linked Securities for the
Exchange.\11\ The Commission also notes that it has not received any
comments regarding this proposal. The Commission believes that the
proposed changes to strike price intervals for options on TIRs do not
raise any novel regulatory issues and accelerating approval of this
proposal should benefit investors by creating consistency and
predictability for investors who may view these products as serving
similar investment functions in the marketplace to ETFs and greater
flexibility in achieving their investment objectives.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(2).
    \11\ See Securities Exchange Act Release No. 61696 (March 12,
2010), 75 FR 13174 (March 18, 2010) (SR-CBOE-2010-005).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-CBOE-2010-036) be, and
hereby is, approved on an accelerated basis.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-12693 Filed 5-26-10; 8:45 am]
BILLING CODE 8010-01-P


P-21-0037-0038 Sanitized Support Documents Index:
 P-21-0037 Sanitized Premanufacture Notice (linked)
 P-21-0038 Sanitized Premanufacture Notice (linked)
 P-21-0037-0038 Sanitized Determination Document (linked)
 P-21-0037 Sanitized CHEM Report (attached)
 P-21-0038 Sanitized CHEM Report (attached)
 P-21-0037 Sanitized ECO Report (attached)
 P-21-0038 Sanitized ECO Report (attached)
 P-21-0037-0038 Sanitized ENG Report (attached)
 P-21-0037-0038 Sanitized EXP Report (attached)
 P-21-0037 Sanitized Fate Report (attached)
 P-21-0038 Sanitized Fate Report (attached)
 P-21-0037-0038 Sanitized HLTH Report_POST-FOCUS FINAL (attached)