[Federal Register Volume 87, Number 249 (Thursday, December 29, 2022)]
[Notices]
[Pages 80228-80231]
[FR Doc No: 2022-28298]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96571; File No. SR-NSCC-2022-016]

Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing and Immediate Effectiveness of a Proposed
Rule Change To Amend Certain Fees

December 22, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 20, 2022, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by the clearing agency.
NSCC filed the proposed rule change pursuant to Section 19(b)(3)(A) of
the Act \3\ and Rule 19b-4(f)(2) thereunder.\4\ The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change

    The proposed rule change modifies Addendum A (Fee Structure)
(``Addendum A'') of NSCC's Rules & Procedures (``Rules'') to reduce
certain trade clearance fees, as described below.\5\
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    \5\ Capitalized terms used herein and not otherwise defined
shall have the meaning assigned to such terms in the Rules,
available at http://dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to amend Addendum A
(Fee Structure) of the Rules to modify the ``value into the net'' and
``value out of the net'' components of NSCC's Clearance Activity Fees
effective January 1, 2023. The proposed fee change is discussed in
detail below.
Background
    NSCC provides clearance and settlement services for trades executed
by its Members in the U.S. equity, corporate and municipal bond, and
unit investment trust markets and for equities securities financing
transactions (``SFTs'') entered into by Members, certain firms that are
sponsored into NSCC membership by a Sponsoring Member, and Agent
Clearing Members on behalf of their customers, as provided in the
Rules. Members are charged fees in accordance with Addendum A based
upon Members' activities and the NSCC services utilized.
    As part of the annual budgeting process, NSCC reviews price levels
against its cost of operations and evaluates potential expense
reductions and/or fee changes to correct any misalignment of costs and
fees. NSCC's fees are cost-based plus a markup as approved by the Board
of Directors or management (pursuant to authority delegated by the
Board), as applicable. This markup is applied to recover development
costs and operating expenses and to accumulate capital sufficient to
meet regulatory and economic requirements.\6\
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    \6\ NSCC maintains procedures to control costs and regularly
review pricing levels against costs of operation. See NSCC
Disclosure Framework for Covered Clearing Agencies and Financial
Market Infrastructures, available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC_Disclosure_Framework.pdf, at 120.
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    During the 2023 budgeting process, management identified
opportunities to better align fees and costs for NSCC, which were
approved by the Businesses, Technology and Operations Committee of the
Board of Directors. As a result of this review, NSCC is proposing to

reduce the ``value into the net'' and ``value out of the net''
components of its Clearance Activity Fees.
Proposed Fee Changes
    Pursuant to Section II.A. of Addendum A, NSCC charges Clearance
Activity Fees for SFT and non-SFT transactions. For transactions
excluding SFTs, NSCC charges a (i) ``value into the net'' fee of $0.47
per million of processed value (i.e., for CNS and Balance Order
netting, the sum of the contract amount and any CNS fail value) and
(ii) a ``value out of the net'' fee of $2.56 per million of settling
value (i.e., the absolute value of the CNS Long and Short Positions).
The ``value into the net'' fee is the value of transactions for which a
broker is buyer or seller (excluding non-DTCC settling trades, non-CNS
municipal bond transactions, flip trades, and foreign security trades)
and is calculated as the gross cleared value prior to netting. The
``value into the net'' fee also includes any fails re-entered into CNS.
The into the net value reflects the aggregate of each opening CNS
security position multiplied by the current market price for each
security. The ``value out of the net'' fee is based on the daily
aggregate market value of all settling CNS positions after netting.\7\
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    \7\ Additional details regarding NSCC's equity trade capture
fees, including the ``value into the net'' and ``value out of the
net'' fees, can be found on the DTCC Learning Center website,
available at https://dtcclearning.com/products-and-services/equities-clearing/utc/utc-users.html.
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    Based on its annal budgeting review, NSCC proposes to (i) decrease
its ``value into the net'' fee from $0.47 to $0.46 per million of
processed value and (ii) decrease its ``value out of the net'' fee from
$2.56 to $2.16 per million of settling value in order to achieve a
targeted annual fee revenue reduction of approximately $30 million. The
``value into the net'' and ``value out of the net'' fees affect all
participants using NSCC's trade capture and CNS Accounting Operation
services. The ``value into the net'' fee, specifically, is the largest
fee type for NSCC. As a result, the proposed reduction in this fee from
$0.47 to $0.46 is expected to result in the largest portion of the
aggregate fee reduction. However, NSCC would be unable to completely
align its targeted projected revenue reduction based on a decrease in
the ``value into the net'' fee alone. NSCC therefore proposes to also
reduce its ``value out of the net'' fee from $2.56 to $2.16 to achieve
its targeted cost-revenue alignment. To effectuate the proposed fee
change, NSCC would amend Section II.A. of Addendum A concerning
Clearance Activity Fees for transactions other than SFTs to reflect the
new ``value into the net'' fee of $0.46 per million of processed value
and ``value out of the net'' fee of $2.16 per million of settling
value.
Expected Member Impact
    The proposed rule change would result in reduced ``value into the
net'' and ``value out of the net'' fees for NSCC Members, the impact of
which would vary based on their usage of the underlying NSCC services.
The proposed fee change is expected to decrease NSCC's overall annual
fee revenue by approximately $30 million. Individual Member impacts are
estimated to range from an approximately 0-13% reduction in fees
depending on their ``value into the net'' and ``value out of the net''
activity.
Member Outreach
    NSCC has conducted ongoing outreach to Members in order to provide
them with notice of the proposed changes and the anticipated impact for
the Member. As of the date of this filing, no written comments relating
to the proposed changes have been received in response to this
outreach. The Commission will be notified of any written comments
received.
Implementation Timeframe
    NSCC would implement this proposal on January 1, 2023. As proposed,
a legend would be added to Addendum A stating there are changes that
became effective upon filing with the Commission but have not yet been
implemented. The proposed legend also would include the date on which
such changes would be implemented and the file number of this proposal,
and state that, once this proposal is implemented, the legend would
automatically be removed.
2. Statutory Basis
    NSCC believes the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a registered clearing agency. Specifically, NSCC believes
the proposed rule change is consistent with Section 17A(b)(3)(D) of the
Act \8\ and Rule 17Ad-22(e)(23)(ii) \9\ thereunder for the reasons set
forth below.
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    \8\ 15 U.S.C. 78q-1(b)(3)(D).
    \9\ 17 CFR 240.17Ad-22(e)(23)(ii).
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    Section 17A(b)(3)(D) of the Act \10\ requires that the rules of a
clearing agency provide for the equitable allocation of reasonable
dues, fees, and other charges among its participants. NSCC believes the
proposed fees would be allocated equitably among its full-service
Members. The proposed rule change would result in reduced ``value into
the net'' and ``value out of the net'' fees for NSCC Members. The
proposed ``value into the net'' and ``value out of the net'' fee
changes would be fairly applied to all Members using NSCC's trade
capture and CNS Accounting Operation services. While the impact of the
proposed fees would vary based on Members' usage of the underlying NSCC
services, the proposed rule change would not alter how the Clearance
Activity Fees are calculated or how such fees are allocated to Members.
As mentioned above, the ``value into the net'' component of the
Clearance Activity Fee is based on the Member's gross cleared value
prior to netting. As such, and as is currently the case, Members that
make greater use of NSCC's guaranteed services would generally be
subject to larger ``value into the net'' fees, and therefore would see
a greater reduction in fees as a result of the proposed fee change,
because such Members would typically have a higher value of gross
positions prior to netting. And conversely, Members that use NSCC's
guaranteed services less would generally be subject to smaller ``value
into the net'' fees, and therefore would see smaller fee reductions,
because such Members would typically have a lower value of gross
positions. Similarly, the ``value out of the net'' component of the
Clearance Activity Fee is based on a Member's daily aggregate market
value of all settling CNS positions after netting. Members that make
greater use of NSCC's guaranteed services are generally subject to
larger ``value out of the net'' fees, and therefore would see greater
fee reductions as a result of the proposed fee change, because such
Members typically have higher value out of the net positions after
netting. Conversely, Members that use NSCC's guaranteed services less
would generally be subject to a smaller ``value out of the net'' fees,
and therefore would see smaller fee reductions, because such Members
would typically have lower value of net positions after netting. The
proposed changes to the ``value into the net'' and ``value out of the
net'' components of the Clearance Activity Fee would not adjust these
allocations or the manner in which the fees are applied. As a result,
NSCC believes the proposed fees would continue to be allocated
equitably among its Members.
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    \10\ 15 U.S.C. 78q-1(b)(3)(D).
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    NSCC also believes that the proposed fee changes are reasonable.
The proposed fees were selected based on an analysis of projected
market volumes and revenues for NSCC during its

annual budgeting process. The proposed fee changes are intended to
better align to the projected operating costs and expenses of NSCC and
would result in an overall reduction of fees imposed on NSCC's Members.
As discussed above, the ``value into the net'' fee is the largest fee
type for NSCC. As a result, the proposed reduction in this fee is
expected to result in the largest portion of the projected aggregate
fee reduction. However, NSCC also proposes to reduce its ``value out of
the net'' fee to achieve its targeted cost-revenue alignment. Together,
the proposed fee changes are designed to achieve a targeted annual fee
revenue reduction of approximately $30 million, which would better
align to the projected operating costs and expenses of NSCC. Moreover,
as noted above, the proposed rule change would not alter how these
Clearance Activity Fees are calculated or how such fees are allocated
to Members. For these reasons, NSCC believes the proposed fees would
continue to be reasonable.
    Rule 17Ad-22(e)(23)(ii) under the Act \11\ requires NSCC to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide sufficient information to
enable participants to identify and evaluate the risks, fees, and other
material costs they incur by participating in the covered clearing
agency. The proposed fees would be clearly and transparently published
in Addendum A of the Rules, which are available on a public
website,\12\ thereby enabling Members to identify the fees and costs
associated with participating in NSCC. As such, NSCC believes the
proposed rule change is consistent with Rule 17Ad-22(e)(23)(ii) under
the Act.\13\
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    \11\ 17 CFR 240.17Ad-22(e)(23)(ii).
    \12\ See supra note 5.
    \13\ 17 CFR 240.17Ad-22(e)(23)(ii).
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(B) Clearing Agency's Statement on Burden on Competition

    NSCC does not believe the proposed reduction in Clearance Activity
Fees would have any impact or burden on competition. As discussed
above, NSCC believes the proposed fees would be allocated equitably
among its full-service Members. The proposed fee change would result in
reduced ``value into the net'' and ``value out of the net'' fees for
NSCC Members, the impact of which would vary based on their usage of
the underlying NSCC services. The proposed ``value into the net'' and
``value out of the net'' fee changes would apply to all Members using
NSCC's trade capture and CNS Accounting Operation services and would
not alter how the Clearance Activity Fees are calculated or allocated
to Members. In the aggregate, NSCC expects the proposed fee change
would result in a reduction of NSCC's annual fee revenue by
approximately $30 million. Individual Member impacts are estimated to
range from an approximately 0-13% reduction in fees depending on their
``value into the net'' and ``value out of the net'' activity. NSCC
believes the proposed fee reduction would not unfairly inhibit access
to NSCC's services by any Member. NSCC therefore believes the proposed
rule changed would not have any impact or burden on competition.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others

    NSCC has conducted outreach to Members to provide them with notice
of the proposed fees.
    NSCC has not received or solicited any written comments relating to
this proposal. If any written comments are received by NSCC, they will
be publicly filed as an Exhibit 2 to this filing, as required by Form
19b-4 and the General Instructions thereto.
    Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
    All prospective commenters should follow the Commission's
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General
questions regarding the rule filing process or logistical questions
regarding this filing should be directed to the Main Office of the
Commission's Division of Trading and Markets at
[email protected] or<PHONE_NUMBER>.
    NSCC reserves the right not to respond to any comments received.

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

    The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) \14\ of the Act and paragraph (f) \15\ of Rule 19b-4
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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    \14\ 15 U.S.C 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f).
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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 email to [email protected]. Please include
File Number SR-NSCC-2022-016 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NSCC-2022-016. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (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 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of NSCC and on DTCC's website
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment

submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
NSCC-2022-016 and should be submitted on or before January 19, 2023.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-28298 Filed 12-28-22; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 82, Number 100 (Thursday, May 25, 2017)]
[Notices]
[Pages 24171-24173]
[FR Doc No: 2017-10686]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80728; File No. SR-BatsBZX-2017-26]

Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend BZX Rule 14.11, Other
Securities, To Provide for the Inclusion of Cash in an Index Underlying
a Series of Index Fund Shares

May 19, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on May 12, 2017, Bats BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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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 the
Substance of the Proposed Rule Change

    The Exchange filed a proposal to amend BZX Rule 14.11, Other
Securities, to provide for the inclusion of cash in an index underlying
a series of Index Fund Shares.
    The text of the proposed rule change is available at the Exchange's
Web site at www.bats.com, at the principal office of the Exchange, and
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant parts of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend BZX Rule 14.11(c), Index Fund
Shares, to provide for the inclusion of cash in an index underlying a
series of Index Fund Shares (``Shares'').\3\ More specifically, BZX
Rules 14.11(c)(3) and 14.11(c)(4) provide ``generic'' criteria
permitting listing and trading of Shares pursuant to Rule 19b-4(e)
under the Act \4\ when the underlying index or portfolio satisfies the
criteria set forth in BZX Rules 14.11(c)(3) related to equity
securities or 14.11(c)(4) related to fixed income securities.
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    \3\ Index Fund Shares are securities issued by an open-end
management investment company based on a portfolio of stocks or
fixed income securities or a combination thereof, that seeks to
provide investment results that correspond generally to the price
and yield performance or total return performance of a specified
foreign or domestic stock index, fixed income securities index or
combination thereof.
    \4\ 17 CFR 240.19b-4(e).
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    The Exchange understands that certain index providers have
included, or intend to include, cash as a component in indexes that
also include equity or fixed income securities components. An index
provider may, for example, provide a certain index weighting allocation
to cash or may periodically change an allocation to cash based on the
index provider's assessment of market risk associated with other asset
classes in the applicable index. Accordingly, the Exchange proposes to
amend BZX Rules 14.11(c)(3) and 14.11(c)(4) to explicitly permit
listing and trading of Shares based on an index or portfolio that
includes cash as a component.
    BZX Rule 14.11(c)(3)(A)(i) currently provides that the component
stocks of an index or portfolio of U.S. Component Stocks \5\ underlying
a series of Shares must meet certain requirements related to the market
cap, trading volume, weighting, diversity, and security requirements.
BZX Rule 14.11(c)(3)(A)(ii) currently provides that the components of
an index or portfolio underlying a series of Shares that consist of
either only Non-U.S. Component Stocks \6\ or both U.S. Component Stocks
and Non-U.S. Component Stocks must meet certain similar requirements
related to the market cap, trading volume, weighting, diversity, and
security requirements that are either equally or more restrictive than
for an index or portfolio of U.S. Component Stocks. Finally, BZX Rule
14.11(c)(4)(B)(i) provides that each component of an index or portfolio
that underlies a series of Shares shall meet the following criteria:
The index or portfolio must consist of Fixed Income Securities \7\ as
well as certain requirements related to original principal outstanding,
convertible securities, weighting, diversity, and certain issuer
requirements. As described below, the proposed amendments to BZX Rule
14.11(c)(3) and 14.11(c)(4) would make clear that cash is permitted to
be held as an index or portfolio component and how such

cash component should be treated for calculation purposes.
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    \5\ Pursuant to BZX Rule 14.11(c)(1)(D), the term ``U.S.
Component Stock'' shall mean an equity security that is registered
under Sections 12(b) or 12(g) of the Act, or an American Depositary
Receipt, the underlying equity security of which is registered under
Sections 12(b) or 12(g) of the Act.
    \6\ Pursuant to BZX Rule 14.11(c)(1)(E), the term ``Non-U.S.
Component Stock'' shall mean an equity security that (a) is not
registered under Sections 12(b) or 12(g) of the Act, (b) is issued
by an entity that is not organized, domiciled or incorporated in the
United States, and (c) is issued by an entity that is an operating
company (including Real Estate Investment Trusts (REITs) and income
trust, but excluding investment trusts, unit trusts, mutual funds,
and derivatives).
    \7\ Pursuant to BZX Rule 14.11(c)(4), Fixed Income Securities
are debt securities that are notes, bonds, debentures or evidence of
indebtedness that include, but are not limited to, U.S. Department
of Treasury securities (``Treasury Securities''), government-
sponsored entity securities (``GSE Securities''), municipal
securities, trust preferred securities, supranational debt and debt
of a foreign country or a subdivision thereof.
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    The Exchange proposes to amend BZX Rule 14.11(c)(3)(A)(i) to make
clear that the components of an index or portfolio underlying a series
of Shares may also include cash. In addition, the percentage weighting
criteria in BZX Rule 14.11(c)(3)(A)(i)(a) through (d) each would be
amended to make clear that such criteria would be applied only to the
U.S. Component Stocks portion of an index or portfolio. For example, in
applying the criteria in proposed BZX Rule 14.11(c)(3)(A)(i)(a),\8\ if
85% of the weight of an index consists of U.S. Component Stocks and 15%
of the index weight is cash, the requirement that component stocks
accounting for 90% of the weight of the index or portfolio have a
minimum market value of $75 million minimum would be applied only to
the 85% portion consisting of U.S. Component Stocks.
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    \8\ Proposed changes to BZX Rule 14.11(c)(3)(A)(i)(a) would
provide that component stocks (excluding Derivative Securities
Products) that in the aggregate account for at least 90% of the
weight of the U.S. Component Stocks portion of the index or
portfolio (excluding such Derivative Securities Products) each shall
have a minimum market value of at least $75 million.
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    The Exchange proposes to amend BZX Rule 14.11(c)(3)(A)(ii), which
relates to international or global indexes or portfolios, in order to
make clear that components of an index or portfolio underlying a series
of Shares may consist of (a) only Non-U.S. Component Stocks, (b) Non-
U.S. Component Stocks and cash, (c) both U.S. Component Stocks and Non-
U.S. Component Stocks, or (d) U.S. Component Stocks, Non-U.S. Component
Stocks and cash. In addition, the percentage weighting criteria in BZX
Rule 14.11(c)(3)(A)(ii)(a) thought (d) each would be amended to make
clear that such criteria would be applied only to the U.S. and Non-U.S.
Component Stocks portions of an index or portfolio.
    As noted above, BZX Rule 14.11(c)(4) provides generic criteria
applicable to listing and trading of Shares whose underlying index or
portfolio includes Fixed Income Securities. The Exchange proposes to
amend BZX Rule 14.11(c)(4)(B)(i)(a) to make clear that the index or
portfolio may also include cash. In addition, the percentage weighting
criteria in BZX Rule 14.11(c)(4)(B)(i)(b), BZX Rule
14.11(c)(4)(B)(i)(d), and BZX Rule 14.11(c)(4)(B)(i)(f) each would be
amended to make clear that such criteria would be applied only to the
Fixed Income Securities portion of an index or portfolio. For example,
in applying the criteria in proposed Rule 14.11(i)(4)(B)(i)(b),\9\ if
90% of the weight of an index or portfolio consists of Fixed Income
Securities and 10% of the index weight is cash, the requirement that
Fixed Income Securities accounting for at least 75% of the weight of
the index or portfolio have a minimum original principal amount
outstanding of $100 million would be applied only to the 90% portion of
the index or portfolio that consists of Fixed Income Securities.
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    \9\ Proposed 14.11(c)(4)(B)(i)(b) would provide that Fixed
Income Security components that in aggregate account for at least
75% of the Fixed Income Securities portion of the weight of the
index or portfolio each shall have a minimum original principal
amount outstanding of $100 million or more.
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    The Exchange notes that the Commission has previously approved
Exchange rules allowing portfolios held by issues of Managed Fund
Shares (actively-managed exchange-traded funds) under BZX Rule
14.11(i)(4)(C) to include cash.\10\ Like the provision in BZX Rule
14.11(i)(4)(C)(iii), which states that there is no limit to cash
holdings by an issue of Managed Fund Shares listed under BZX Rule
14.11(i)(4)(C), there is no proposed limit to the weighting of cash in
an index underlying a series of Shares. The Exchange believes this is
appropriate in that cash does not, in itself, impose investment or
market risk.
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    \10\ See BZX Rule 14.11(i)(4)(C)(iii).
---------------------------------------------------------------------------

    The Exchange believes the proposed amendments, by permitting
inclusion of cash as a component of indexes underlying series of
Shares, would provide issuers of Shares with additional choice in
indexes permitted to underlie Shares that are permitted to list and
trade on the Exchange pursuant to the Rule 19b-4(e), which would
enhance competition among market participants, to the benefit of
investors and the marketplace. In addition, the proposed amendments
would provide investors with greater ability to hold Shares based on
underlying indexes that may accord more closely with an investor's
assessment of market risk, in that some investors may view cash as a
desirable component of an underlying index under certain market
conditions.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\11\ in general, and furthers the
objectives of Sections 6(b)(5) of the Act,\12\ in particular, because
it is designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to, and
perfect the mechanisms of, a free and open market and a national market
system and, in general, to protect investors and the public interest
and because it is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange has in place surveillance procedures that are adequate
to properly monitor trading in Shares in all trading sessions and to
deter and detect violations of Exchange rules and applicable federal
securities laws.
    The Exchange notes that, as described above, the percentage
weighting criteria in BZX Rule 14.11(c)(3)(A)(i)(a) through (d) (U.S.
index or portfolio) each would be amended to make clear that such
criteria would apply only to the U.S. Component Stocks portion of an
index or portfolio; BZX Rule 14.11(c)(3)(A)(ii)(a) through (d)
(international or global index or portfolio) each would be amended to
make clear that such criteria would be applied only to the U.S. and
Non-U.S. Component Stocks portions of an index or portfolio; and the
percentage weighting criteria in BZX Rule 14.11(c)(4)(B)(i)(b), (d),
and (f) (fixed income index or portfolio) each would be amended to make
clear that such criteria would be applied only to the Fixed Income
Securities portion of an index or portfolio. Such applications of the
proposed amendments would assure that the weighting requirements in
Rules 14.11(c)(3) and 14.11(c)(4) would continue to be applied only to
securities in an index or portfolio, and would not be diluted as a
result of inclusion of a cash component. In addition, the addition of
cash as a permitted component of indexes underlying Shares listed and
traded on the Exchange pursuant to Rule 19b-4(e) does not raise
regulatory issues because cash does not, in itself, impose investment
or market risk and is not susceptible to manipulation.
    The Exchange believes the proposed amendments, by explicitly
permitting inclusion of cash as a component of indexes underlying
series of Shares, would provide issuers of Shares with additional
choice in indexes permitted to underlie Shares that are permitted to
list and trade on the Exchange pursuant to the Rule 19b-4(e), which
would enhance competition among market participants, to the benefit of
investors and the marketplace. In addition, the proposed amendments
would provide

investors with greater ability to hold Shares based on underlying
indexes that may accord more closely with an investor's assessment of
market risk.

B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\13\ the Exchange
believes that the proposed rule change would not impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. The proposed rule change would explicitly permit
Exchange listing and trading under Rule 19b-4(e) of Shares based on
indexes that include cash as a component, which would enhance
competition among market participants, to the benefit of investors and
the marketplace.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received written comments on
the proposed rule change.

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 up to 90 days (i) as the
Commission may designate 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 email to<EMAIL_ADDRESS>Please include
File Number SR-BatsBZX-2017-26 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BatsBZX-2017-26. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (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 Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BatsBZX-2017-26, and should
be submitted on or before June 15, 2017.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-10686 Filed 5-24-17; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register: August 9, 2010 (Volume 75, Number 152)]
[Notices]
[Page 47863-47869]
[DOCID:fr09au10-88]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62621 File No. SR-FINRA-2010-034]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt
FINRA Rule 4530 (Reporting Requirements) in the Consolidated FINRA
Rulebook

July 30, 2010.
    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 July 30, 2010, 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,
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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    FINRA is proposing to adopt NASD Rule 3070 (Reporting Requirements)
as FINRA Rule 4530 (Reporting Requirements) in the consolidated FINRA
rulebook, subject to certain amendments, and to delete paragraphs (a)
through (d) of Incorporated NYSE Rule 351 (Reporting Requirements) and
Incorporated NYSE Rules 351.10 and 351.13. The proposed rule change
also would add a supplementary material section to proposed FINRA Rule
4530.
    The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, on the Commission's Web site at http://
www.sec.gov, 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 3070 as FINRA Rule 4530 in the Consolidated FINRA Rulebook,
subject to certain amendments as described below. The proposed rule
change also would delete paragraphs (a) through (d) of Incorporated
NYSE Rule 351\4\ and NYSE Rules 351.10 and 351.13 from the Transitional
Rulebook.\5\ Further, the proposed rule change would add a
supplementary material section to proposed FINRA Rule 4530 as detailed
below.
---------------------------------------------------------------------------

    \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, the Incorporated NYSE Rules are referred to
as the NYSE Rules.
    \5\ NYSE Rule 351(e) and NYSE Rule Interpretation 351(e)/01
(Reports of Investigation) govern trade investigation reporting
requirements. NYSE Rules 351(f), 351.11 and 351.12 govern the annual
attestation requirement of the research analyst conflict of interest
rules. These provisions will be addressed as part of the supervision
rules and research analyst conflict of interest rules, respectively.
See Regulatory Notice 08-24 (May 2008) (Proposed Consolidated FINRA
Rules Governing Supervision and Supervisory Controls) and Regulatory
Notice 08-55 (October 2008) (FINRA Requests Comment on Proposed
Research Registration and Conflict of Interest Rules).
---------------------------------------------------------------------------

Background
    NASD Rule 3070 and NYSE Rule 351 require members to report to FINRA
certain specified events (e.g., regulatory actions) and quarterly
statistical and summary information regarding written customer
complaints. FINRA uses the reported information for regulatory
purposes. Among other things, the information assists FINRA to identify
and investigate firms, offices and associated persons that may pose a
regulatory risk.
Proposal
    FINRA proposes replacing NASD Rule 3070 and NYSE Rule 351 with a
single

rule, proposed FINRA Rule 4530, in the Consolidated FINRA Rulebook.
FINRA Rule 4530 is based in large part on NASD Rule 3070, taking into
account certain requirements under NYSE Rule 351. The proposed rule
also includes a supplementary material section that contains certain
clarifications and definitions as well as codifications of existing
staff guidance. More specifically, FINRA is proposing the following
changes.
a. Reporting Deadline (Proposed FINRA Rule 4530(a))
    FINRA Rule 4530(a) consolidates the requirement (currently in NASD
Rules 3070(a)(1), (a)(9) and (b)) that a firm report an event after the
firm ``knows or should have known'' of the existence of the event.
Consistent with the requirements of NYSE Rule 351, FINRA Rule 4530(a)
also extends the time period for reporting any of the events specified
in paragraph (a) of the proposed rule to no later than 30 calendar days
after the firm knows or should have known of the existence of the event
(rather than the 10 business days currently provided under NASD Rule
3070(b)). The proposed 30-calendar-day reporting deadline also is
consistent with the reporting deadline for disclosing information on
the Forms BD (Uniform Application for Broker-Dealer Registration), U4
(Uniform Application for Securities Industry Registration or Transfer)
and U5 (Uniform Termination Notice for Securities Industry
Registration) (collectively referred to as the ``Uniform Forms'').
b. External Findings (Proposed FINRA Rule 4530(a)(1)(A))
    NASD Rule 3070(a)(1) requires that a firm report whenever the firm
or an associated person of the firm has been found to have violated any
provision of any securities law or regulation, ``any'' rule or standard
of conduct of ``any'' governmental agency, self-regulatory organization
(``SRO''), or financial business or professional organization, or
engaged in conduct that is inconsistent with just and equitable
principles of trade. This provision requires firms to report findings
of violations by an external body.
    FINRA Rule 4530(a)(1)(A) generally retains the requirement under
NASD Rule 3070(a)(1), though it limits the scope of reportable findings
of violation by an external body to violations of any securities-,
insurance-, commodities-, financial- or investment-related laws, rules,
regulations or standards of conduct of any domestic or foreign
regulatory body, SRO or business or professional organization. FINRA
believes that limiting the scope of the rule to violations of any
securities-, insurance-, commodities-, financial- or investment-related
laws, rules, regulations or standards of conduct of any domestic or
foreign regulatory body, SRO or business or professional organization
will make it more effective and relevant to FINRA's program, as well as
enhance firms' ability to more accurately report such information. For
similar reasons, FINRA has eliminated the requirement that firms report
any and all findings that amount to violations of just and equitable
principles of trade. However, for instance, firms would continue to
report a finding of violation of an SRO's just and equitable principles
of trade rule, such as FINRA Rule 2010.
c. Civil Litigation or Arbitration; Other Claims for Damages (Proposed
FINRA Rule 4530(a)(1)(G))
    FINRA Rule 4530(a)(1)(G) merges for simplification the reporting
provisions, currently in NASD Rules 3070(a)(7) and (a)(8) and NYSE
Rules 351(a)(7) and (a)(8), pertaining to (1) any securities- or
commodities-related civil litigation or arbitration; and (2) any claim
for damages by a customer or broker-dealer, disposed of by judgment,
award or settlement for certain monetary thresholds. In addition, the
proposed rule extends the provision relating to civil litigation or
arbitration matters to include the reporting of any ``insurance'' civil
litigation or arbitration that is ``financial related.'' Further, the
proposed rule clarifies that firms are required to report any claim for
damages by a customer or broker-dealer that is ``financial'' or
``transactional'' in nature. FINRA believes that transactional claims
by customers, including contractual disputes, are relevant to its
programs since they may reveal misconduct, such as an impermissible
customer loan.
d. Statutory Disqualifications (Proposed FINRA Rule 4530(a)(1)(H))
    Consistent with NYSE Rule 351(a)(9), FINRA Rule 4530(a)(1)(H)
requires a firm to report whenever the firm itself is subject to a
``statutory disqualification'' and clarifies that a firm is required to
report whenever an associated person of the firm is subject to a
``statutory disqualification.'' The proposed rule also replaces the
requirement in NASD Rule 3070(a)(9) and NYSE Rule 351(a)(9) to report
whenever a firm or an associated person of the firm ``is associated in
any business or financial activity'' with a person subject to a
``statutory disqualification'' with a requirement to report whenever
the firm or an associated person of the firm ``is involved in the sale
of any financial instrument, the provision of any investment advice or
the financing of any such activities'' with a person subject to a
``statutory disqualification.'' FINRA believes that this change
provides greater clarity as to the scope of the provision.
e. Internal Disciplinary Actions Against Associated Persons (Proposed
FINRA Rule 4530(a)(2))
    Similar to NASD Rule 3070(a)(10) and NYSE Rule 351(a)(10), FINRA
Rule 4530(a)(2) continues to require a firm to report certain
disciplinary actions taken by the firm against its associated persons.
However, the proposed rule clarifies that any such disciplinary action
involving the withholding of compensation or of any other remuneration
(not just commissions) in excess of $2,500 is a reportable event.
f. Internal Conclusions (Proposed FINRA Rules 4530(b) and 4530.01)
    NYSE Rule 351(a)(1) requires that a firm report whenever it or its
associated persons have violated any provision of any securities law or
regulation, ``any'' agreement with or rule or standard of conduct of
``any'' governmental agency, SRO, or business or professional
organization, or engaged in conduct that is inconsistent with just and
equitable principles of trade or detrimental to the interests or
welfare of the NYSE. This provision requires firms to report their
internal conclusions of the enumerated violative conduct.
    FINRA Rule 4530(b) generally incorporates the requirement under
NYSE Rule 351(a)(1) and provides that a firm is required to report to
FINRA no later than 30 calendar days after the firm has concluded, or
reasonably should have concluded, on its own that an associated person
of the firm or the firm itself has engaged in violative conduct.\6\
However, the proposed rule limits the scope of reportable violative
conduct to violations of any securities-, insurance-, commodities-,
financial- or investment-related laws, rules, regulations or standards
of conduct of

any domestic or foreign regulatory body or SRO.
---------------------------------------------------------------------------

    \6\ Proposed FINRA Rule 4530(b) was originally proposed as FINRA
Rule 4530(a)(3) in Regulatory Notice 08-71 (discussed in Item II.C.
of this filing). As discussed above, proposed FINRA Rule 4530(a)
requires a firm to report an event after the firm ``knows or should
have known'' of the existence of the event. To clarify the standard
applicable to a firm's internal conclusion of violation, FINRA is
proposing to re-designate paragraph (a)(3) as paragraph (b) of FINRA
Rule 4530 and require a firm to report where it has concluded or
reasonably should have concluded that the firm or an associated
person has engaged in the enumerated violative conduct.
---------------------------------------------------------------------------

    Additionally, FINRA Rule 4530.01 excludes from the reporting
requirement an isolated violation by the firm or an associated person
of the firm that can be reasonably viewed as a ministerial violation of
the applicable rules that did not result in customer harm and was
remedied promptly upon discovery. Thus, for example, if a firm
discovers a few corporate accounts that, due to a ministerial lapse, do
not have a record identifying the person(s) authorized to transact
business on behalf of the accounts and upon discovering the problem
promptly updates the accounts with the required information, it would
not be considered a reportable event for purposes of proposed FINRA
Rule 4530(b). Conversely, if there is a wholesale failure by a firm to
maintain such information, it would be considered a reportable event
for purposes of the proposed rule.
    Further, if a firm disciplines an associated person in the manner
described in FINRA Rule 4530(a)(2), FINRA Rule 4530.01 requires the
firm to report the event under paragraph (a)(2), rather than paragraph
(b) of the proposed rule.
g. Domestic and Foreign Actions and Actions By a Regulatory Body
(Proposed FINRA Rules 4530(a)(1)(A), (C), (D), (F) and 4530.04)
    Currently, both NASD Rule 3070 and NYSE Rule 351 make frequent
reference to, for example, ``any'' regulatory or self-regulatory body,
without denoting that it includes both domestic and foreign regulators.
FINRA Rules 4530(a)(1)(A), (C), (D) and (F) clarify that they apply to
both domestic and foreign actions and that they apply to actions by a
``regulatory body.'' FINRA Rule 4530.04 defines the term ``regulatory
body'' as governmental regulatory bodies and authorized non-
governmental regulatory bodies, such as the Financial Services
Authority.
h. Reporting Obligation (Proposed FINRA Rule 4530(e))
    NASD Rule 3070(d) provides that compliance with NASD Rule 3070 does
not relieve a firm or an associated person from certain other
obligations, such as the requirement to disclose information on the
Uniform Forms, as applicable.
    FINRA Rule 4530(e) continues the requirement of NASD Rule 3070(d).
The proposed rule also clarifies that a firm has an obligation to
report the specified events (FINRA Rules 4530(a) and (b)) and quarterly
statistical and summary information regarding written customer
complaints (FINRA Rule 4530(d)), regardless of whether such information
is reported or disclosed pursuant to any other rule or requirement,
including the requirements of the Forms BD or U4. However, the proposed
rule provides that a firm is not required to report an event otherwise
required to be reported under FINRA Rules 4530(a) or (b) if the firm
discloses the event on the Form U5, consistent with the requirements of
that form. While information disclosed on the Forms BD and U4 are not
subject to this exception at this time, FINRA will work toward the goal
of eliminating duplicative reporting of information disclosed on those
forms.
i. Elimination of the Exemption for Dual Members Subject to Another
SRO's Rule
    NASD Rule 3070(e) provides an exemption for firms subject to
substantially similar reporting requirements of another SRO. This
provision is intended to exempt Dual Members subject to the reporting
requirements of NYSE Rule 351. The proposed rule change eliminates this
exemption since FINRA proposes creating a single rule and deleting the
applicable reporting requirements of NYSE Rule 351 (as noted below).
Accordingly, all FINRA members will be subject to FINRA Rule 4530.
j. Filing of Related Documents With FINRA (Proposed FINRA Rule 4530(f))
    NASD Rule 3070(f) requires a firm to file copies of certain
criminal and civil complaints and arbitration claims with FINRA,
including copies of (1) any complaint in which the firm is named as a
defendant or respondent in any securities- or commodities-related
private civil litigation; and (2) any securities- or commodities-
related arbitration claim filed against the firm in any forum other
than FINRA Dispute Resolution. Consistent with FINRA Rule 4530(a)(1)(G)
discussed above, FINRA Rule 4530(f) extends the filing requirement to
copies of any ``insurance'' civil litigation or arbitration that is
``financial related.''
k. Additional Supplementary Material (Proposed FINRA Rules 4530.02,
.03, .05, .06, .07 and .08)
    In addition to the supplementary material discussed above (FINRA
Rules 4530.01 and .04), FINRA proposes adding the following
supplementary material:
     FINRA Rule 4530.02 clarifies the distinction between a
firm's internal conclusion of violative conduct and a finding of
violative conduct by an external body, such as a court, domestic or
foreign regulatory body, SRO or business or professional organization;
     FINRA Rule 4530.03 defines the term ``found'' as used in
FINRA Rule 4530(a)(1)(A) generally consistent with the definition of
the term in the Uniform Forms, and clarifies that the term also
includes any formal finding (regardless of whether the finding will be
appealed), but that it does not include a minor rule violation
involving a fine of $2,500 or less;
     FINRA Rule 4530.05 clarifies that for purposes of FINRA
Rules 4530(a) and (b), firms should not report a single event under
more than one paragraph or subparagraph, but that they may be required
to report related events under more than one paragraph or subparagraph.
     FINRA Rule 4530.06 clarifies that when calculating the
monetary thresholds for reporting civil litigations, arbitrations or
claims for damages for purposes of FINRA Rule 4530(a)(1)(G), firms must
include any attorneys fees and interest in the total amount. The
proposed rule also codifies existing staff guidance regarding the
calculation of the monetary thresholds when the parties are subject to
``joint and several'' liability (i.e., if the parties are subject to
``joint and several'' liability, each party is separately liable for
the aggregate amount); \7\
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    \7\ See Notice to Members 96-85 (December 1996) (Customer
Complaint Reporting Rule Update).
---------------------------------------------------------------------------

     FINRA Rule 4530.07 clarifies that for purposes of FINRA
Rules 4530(a), (b) and (d), firms should report an event relating to a
former associated person if the event occurred while the individual was
associated with the member; and
     FINRA Rule 4530.08 codifies existing staff guidance
regarding a firm's obligation to report quarterly statistical and
summary information with respect to written customer complaints
alleging theft or misappropriation of funds or securities, or
forgery.\8\
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    \8\ See Notice to Members 96-85.
---------------------------------------------------------------------------

l. Provisions Transferring With Non-Substantive Changes (Proposed FINRA
Rules 4530(a)(1)(B), (a)(1)(E), (d) and (g))
    FINRA proposes to transfer into FINRA Rule 4530 with non-
substantive changes the provisions of NASD Rules 3070(a)(2), (a)(5),
(c) and (g).
m. NYSE Provisions Proposed for Deletion
    FINRA proposes to delete paragraphs (a) through (d) of NYSE Rule
351 and NYSE Rules 351.10 and 351.13 relating to the reporting of
specified events and quarterly statistical and summary information
regarding written customer

complaints as these provisions are substantially similar to proposed
FINRA Rule 4530, otherwise incorporated as described above, rendered
obsolete by the approach reflected in the proposed rule, or addressed
by other rules.
    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 240 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,\9\ 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
further the purposes of the Act by enhancing FINRA's ability to detect
and investigate violative conduct.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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 November 2008, FINRA published Regulatory Notice 08-71
soliciting comment on a proposal relating to the FINRA reporting
requirements. FINRA received 21 comment letters in response to the
Notice,\10\ which are discussed below.\11\ A copy of the Notice is
attached as Exhibit 2a. A list of the comment letters received in
response to the Notice is attached as Exhibit 2b. Copies of the comment
letters received in response to the Notice are attached as Exhibit
2c.\12\
---------------------------------------------------------------------------

    \10\ See Letter from Puplava Securities, Inc., dated December 4,
2008 (``Puplava''); letter from Committee of Annuity Insurers, dated
December 29, 2008 (``CAI''); letter from Cutter & Company, Inc.,
dated December 29, 2008 (``Cutter''); letter from Farmers Financial
Solutions, LLC, dated December 29, 2008 (``Farmers''); letter from
National Association of Independent Broker-Dealers, Inc., dated
December 29, 2008 (``NAIBD''); letter from GBS Financial Corp.,
dated December 30, 2008 (``GBS''); letter from Goodwin Browning &
Luna Securities, dated December 30, 2008 (``Goodwin''); letter from
OmniCap, LLC, dated December 30, 2008 (``OmniCap''); letter from
Pointe Capital, Inc., dated December 30, 2008 (``Pointe''); letter
from R.F. Lafferty & Co., Inc., dated December 30, 2008
(``Lafferty''); letter from Wachovia Securities, LLC, dated December
30, 2008 (``Wachovia''); letter from Financial Telesis, Inc., dated
January 5, 2009 (``Telesis''); letter from Askar Corp., dated
January 6, 2009 (``Askar''); letter from Investment Company
Institute, dated January 15, 2009 (``ICI''); letter from
Northwestern Mutual Investment Services, LLC, dated January 15, 2009
(``Northwestern''); letter from Charles Schwab & Co., Inc., dated
January 16, 2009 (``Schwab''); letter from Financial Services
Institute, Inc., dated January 16, 2009 (``FSI''); letter from
National Society of Compliance Professionals, Inc., dated January
16, 2009 (``NSCP''); letter from PFS Investments, Inc., dated
January 16, 2009 (``PFS''); letter from the Securities Industry and
Financial Markets Association, dated January 16, 2009 (``SIFMA'');
and letter from State Farm VP Management Corp., dated January 16,
2009 (``State Farm'').
    \11\ Askar, GBS, Goodwin, Lafferty, OmniCap, Pointe and Telesis
support NAIBD's comments. Northwestern submitted its own comments,
but it also supports FSI's comments.
    \12\ The Commission notes that these documents are attached to
the filing, not to this notice.
---------------------------------------------------------------------------

1. Reporting Deadline (Proposed FINRA Rule 4530(a))
    As discussed above, the proposed rule requires that a firm report
an event after the firm ``knows or should have known'' of the existence
of the event. One commenter argues that the ``should have known''
standard is too demanding.\13\ The purpose of the ``should have known''
standard is to ensure that members do not intentionally avoid becoming
aware of a reportable event.\14\ FINRA does not believe that this
standard, which has been a part of NASD Rule 3070 since its adoption,
is too demanding.
---------------------------------------------------------------------------

    \13\ NSCP.
    \14\ See also Securities Exchange Act Release No. 35956 (July
11, 1995), 60 FR 36838 (July 18, 1995) (Notice of File No. SR-NASD-
95-16).
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2. External Findings (Proposed FINRA Rule 4530(a)(1)(A))
    Several commenters argue that the proposed rule, including the
requirement to report external findings relating to ``insurance''
matters, is too expansive and unduly burdensome.\15\ As noted above,
the proposed rule actually limits the scope of current reportable
external findings and requires firms to report external findings
related to the financial services industry (i.e., securities,
insurance, commodities, financial or investment related). Additionally,
the requirement to report matters related to the financial services
industry, such as ``insurance'' and ``commodities'' matters, is
consistent with other provisions of the current rules. This information
assists FINRA in identifying and investigating firms, offices and
associated persons that may pose a regulatory risk. Some of these
commenters are also concerned that the proposed rule may reach the
activities of affiliates.\16\ Similar to NASD Rule 3070, the proposed
rule is limited to findings against a firm or an associated person of
the firm.
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    \15\ FSI, NAIBD, Northwestern, NSCP and State Farm.
    \16\ FSI, Northwestern and NSCP.
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    Some commenters believe that the proposed term ``business or
professional organization'' is overly broad and vague compared to the
current term ``financial business or professional organization.'' \17\
The proposed rule requires firms to report a business or professional
organization's findings of violations relating to securities,
insurance, commodities, financial or investment-related matters. For
instance, a finding of violation of the Code of Professional Conduct of
the American Institute of Certified Public Accountants is an example of
the type of finding by a business or professional organization that is
reportable under the proposed rule.
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    \17\ NAIBD, NSCP and Wachovia.
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3. Civil Litigation or Arbitration; Other Claims for Damages (Proposed
FINRA Rule 4530(a)(1)(G))
    As originally proposed in Regulatory Notice 08-71, the rule
required members to report any insurance-related civil litigation or
arbitration. The purpose of this proposed change was to make the
provision consistent with other provisions of NASD Rule 3070 and NYSE
Rule 351 that require the reporting of regulatory matters relating to
insurance. Several commenters argued that the proposed requirement will
result in voluminous reporting regarding insurance matters completely
unrelated to securities activities (e.g., auto and health).\18\ In
response, FINRA has revised the proposed rule to require the reporting
of any ``insurance'' civil litigation or arbitration that is
``financial related.'' One of these commenters also argued that the
requirement to report ``any other claim for damages'' by a customer or
broker-dealer is too expansive since it may require the reporting of a
wide array of matters (e.g., family grievances).\19\ In response to
this comment, FINRA has revised the proposed rule to require the
reporting of any claim for damages by a customer or broker-dealer that
is ``financial'' or ``transactional'' in nature.
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    \18\ CAI, Cutter, Farmers, FSI, NSCP, Schwab and State Farm.
    \19\ Cutter.
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    One commenter asks that FINRA clarify that matters reportable under
the proposed rule continue to be subject to the current dollar
thresholds for

reporting ($15,000 for associated persons; $25,000 for firms).\20\ In
response to this comment, FINRA has revised the proposed rule to
clarify this point.
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    \20\ State Farm.
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    Several commenters suggest that the current dollar thresholds for
reporting are too low and outdated.\21\ FINRA believes that the current
dollar thresholds continue to be consistent with the purposes of the
rule. In addition, the $15,000 reporting threshold for an associated
person is consistent with the Forms U4 and U5 current reporting
thresholds.
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    \21\ CAI, FSI and NSCP.
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4. Statutory Disqualifications (Proposed FINRA Rule 4530(a)(1)(H))
    As noted above, the proposed rule replaces the current requirement
to report whenever a firm or an associated person of the firm ``is
associated in any business or financial activity'' with a person
subject to a ``statutory disqualification'' with a requirement to
report whenever the firm or an associated person of the firm ``is
involved in the sale of any financial instrument, the provision of any
investment advice or the financing of any such activities'' with a
person subject to a ``statutory disqualification.'' Two commenters ask
whether the term ``investment advice'' in the proposed rule refers to
advisory activities and suggest that the inclusion of such activities
broadens the scope of NASD Rule 3070(a)(9) and NYSE Rule 351(a)(9).\22\
FINRA notes that advisory activities are covered under the current
rules (i.e., considered a ``financial activity'') and will continue to
be covered under the proposed rule. One of these commenters also
requests that FINRA Rule 4530(a)(1)(H) include the phrase ``knows or
should have known,'' which is currently in NASD Rule 3070(a)(9).\23\ As
discussed above, FINRA is proposing to consolidate in a single
paragraph, FINRA Rule 4530(a), the various references to the ``knows or
should have known'' standard.
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    \22\ Cutter and NAIBD.
    \23\ NAIBD.
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5. Internal Disciplinary Actions Against Associated Persons (Proposed
FINRA Rule 4530(a)(2))
    Several commenters suggest that the current $2,500 threshold for
reporting internal disciplinary actions is too low and outdated.\24\
FINRA believes that the current dollar threshold continues to be
consistent with the purposes of the rule.
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    \24\ CAI, FSI and NSCP.
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6. Internal Conclusions (Proposed FINRA Rules 4530(b) and 4530.01)
    Several commenters believe that the proposed provisions are
unnecessary, unduly burdensome, overly broad and costly.\25\ These
commenters also argue that the provisions are vague and too subjective
and that certain terms, such as ``the member has concluded,''
``isolated'' and ``ministerial,'' need further clarification. For
instance, one commenter asks whether internal conclusions that are
equivalent to minor rule violations will have to be reported.\26\ One
commenter recommends that the proposal exclude either a ``ministerial''
or ``non-material'' violation.\27\ One commenter suggests that the
requirement be limited to those matters that result in ``material
customer harm.'' \28\ Another commenter recommends that the requirement
be limited to matters that result in ``customer harm.'' \29\ Some of
these commenters also suggest that if FINRA opts to retain the proposed
requirement, it adopt the reporting standard set forth in NYSE
Information Memorandum 06-11, which provides that if a firm determines
not to impose discipline against an individual, the firm need only
report any recidivist or ongoing violative conduct by the
individual.\30\ NYSE Information Memorandum 06-11 also provides that a
firm need only report systemic firm failures involving numerous
customers, multiple errors or significant dollar amounts, as well as
violative conduct by the firm or its employees that has widespread or
potential widespread impact to the firm, its customers or the industry.
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    \25\ CAI, FSI, ICI, Northwestern, NSCP, PFS, Schwab, SIFMA and
State Farm.
    \26\ Schwab.
    \27\ ICI.
    \28\ Northwestern.
    \29\ FSI.
    \30\ FSI, NSCP, PFS, Schwab and SIFMA.
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    FINRA believes that the standard set forth in Information
Memorandum 06-11 is too narrow. However, in response to the comments,
FINRA has provided an example in Item II.A. of this filing of the types
of reportable and non-reportable matters.
    One commenter suggests that the proposed requirement be limited to
conclusions reached at a senior level.\31\ Another commenter requests
that FINRA clarify that a settlement with a customer does not create
the presumption that a reportable violation has occurred.\32\
Additionally, one commenter asks whether internal audit findings are
deemed internal conclusions.\33\ FINRA believes that a firm is free to
determine the level of seniority required of an associated person in
making a determination of a reportable internal conclusion; however, it
will not be a defense to a failure to report such conduct that it was
of a nature that did not merit consideration by a person of such
seniority. With respect to settlements, it is not the fact that a firm
has settled a matter that makes it a reportable event under FINRA Rule
4530(b), rather it is whether the firm has reached an internal
conclusion or reasonably should have reached an internal conclusion
that the firm or an associated person has engaged in the enumerated
violative conduct.\34\ Regarding internal audit findings, FINRA
believes that the existence of such findings creates a strong
presumption that the matter is reportable, but that any particular
finding is eligible to be viewed by the firm as non-reportable (i.e.,
an isolated, ministerial violation that did not result in customer harm
and was remedied promptly upon discovery).
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    \31\ CAI.
    \32\ PFS.
    \33\ NSCP.
    \34\ Firms should note that certain settlements will have to be
reported based on other reporting requirements (e.g., FINRA Rule
4530(a)(1)(G)).
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    Further, two commenters believe that matters subject to a firm's
internal review process as required under other rules (e.g., FINRA Rule
3130 (Annual Certification of Compliance and Supervisory Processes))
should be excluded from the proposed requirement.\35\ FINRA believes
that firms have an obligation to meet each of their regulatory
requirements (including the requirements of FINRA Rule 3130) and that
the obligation to meet a regulatory requirement is not superseded based
on compliance with other regulatory requirements.
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    \35\ CAI and ICI.
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    Additionally, some commenters suggest that the proposed requirement
may have a chilling effect on a firm's willingness to reach such
conclusions or that reporting such information, which may lack
qualified or total immunity, may result in defamation suits.\36\
Without opining on the issues raised by these commenters, FINRA
questions the collateral effects posited by the commenters given the
use of the information for FINRA internal examination and enforcement
purposes and that, in any event, FINRA believes that the goals of
customer protection and market integrity necessitate the reporting of
such conduct to FINRA.
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    \36\ CAI, FSI and Schwab.

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7. Domestic and Foreign Actions and Actions By a Regulatory Body
(Proposed FINRA Rules 4530(a)(1)(A), (C), (D), (F) and 4530.04)
    One commenter suggests that it may be too difficult to obtain
information from foreign regulatory bodies.\37\ In general, firms
should report the information in their custody, possession, or control
or to which they have knowledge and provide an explanation in the
appropriate reporting system fields of the information that they were
unable to obtain due to circumstances beyond their control. In
addition, as noted above, firms cannot intentionally avoid becoming
aware of a reportable event.
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    \37\ NSCP.
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8. Quarterly Statistical and Summary Information Regarding Written
Customer Complaints (Proposed FINRA Rule 4530(d))
    One commenter argues that the requirement to report quarterly
statistical and summary information regarding written customer
complaints, including e-mails, is unduly burdensome and wants to know
how the data is used and how it benefits the industry.\38\ FINRA uses
the reported information for its internal examination and enforcement
purposes. Among other things, the information assists FINRA to identify
and investigate firms, offices and associated persons that may pose a
regulatory risk.
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    \38\ Puplava.
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    Additionally, in response to one commenter,\39\ FINRA wishes to
clarify an interpretive position related to FINRA Rule 4530(c). In
Notice to Members 96-85, FINRA (then NASD) stated that for purposes of
reporting written customer complaints under NASD Rule 3070(c), the term
``customer'' is defined as any person other than a broker-dealer with
whom the member has engaged, or has sought to engage, in securities
activities, therefore, it was intended to exclude non-securities
products. A member is not required to report written complaints
relating to non-securities products, but only to the extent that such
complaints are not from customers that the member has engaged, or has
sought to engage, in securities activities. However, if a member has
engaged, or has sought to engage, in securities activities with a
person, then any written complaint from that person is reportable under
the proposed rule, regardless of whether it relates to non-securities
products.\40\
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    \39\ Schwab.
    \40\ FINRA notes that the original proposal in Regulatory Notice
08-71 included a provision reminding firms of their obligations
under proposed FINRA Rule 3110(b)(5) to have procedures to capture,
acknowledge and respond to all written (including electronic)
customer complaints. Proposed FINRA Rule 3110(b)(5) is part of the
proposed consolidated supervision rules. See Regulatory Notice 08-24
(May 2008) (Proposed Consolidated FINRA Rules Governing Supervision
and Supervisory Controls). FINRA will consider whether to re-propose
the reference to FINRA Rule 3110(b)(5) at a later date.
---------------------------------------------------------------------------

9. Reporting Obligation (Proposed FINRA Rule 4530(e))
    As originally proposed in Regulatory Notice 08-71, the rule
required members to report an event under the rule regardless of
whether the event was disclosed on the Forms BD, U4 or U5. Several
commenters raised concerns regarding this obligation.\41\ FINRA has
revised the proposed rule to provide that a firm is not required to
report an event otherwise required to be reported under FINRA Rules
4530(a) or (b) if the firm has disclosed the event on the Form U5,
consistent with the requirements of that form. This exception to FINRA
Rules 4530(a) and (b) only applies to information that has been
disclosed on the Form U5. As noted above, FINRA will also work toward
the goal of eliminating duplicative reporting of information disclosed
on the Forms BD and U4.
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    \41\ CAI, Cutter, FSI, NAIBD, NSCP, Schwab and SIFMA.
---------------------------------------------------------------------------

10. Filing of Related Documents with FINRA (Proposed FINRA Rule
4530(f))
    As originally proposed in Regulatory Notice 08-71, the rule
required members to file, in addition to report, any insurance-related
civil litigation or arbitration. Several commenters argued that the
proposed requirement will result in voluminous filings regarding
insurance matters completely unrelated to securities activities.\42\
Consistent with the revisions to FINRA Rule 4530(a)(1)(G) discussed
above, FINRA Rule 4530(f) has been revised to require the filing of
copies of any ``insurance'' civil litigation complaint or arbitration
claim that is ``financial related.''
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    \42\ CAI, Farmers, NSCP and State Farm.
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11. Calculation of Monetary Thresholds and Former Associated Persons
(Proposed FINRA Rules 4530.06 and .07)
    Several commenters raise concerns regarding the inclusion of
attorneys fees and interest when calculating the dollar thresholds for
reporting civil litigations, arbitrations or other claims for
damages.\43\ Based on FINRA's experience, some firms have considered
structuring settlements using attorneys fees to avoid the dollar
thresholds for reporting. The inclusion of attorneys fees and interest
in the proposed rule is intended to address this concern. One commenter
believes that ``joint and several'' liability should not be aggregated
for purposes of the proposed rule.\44\ As noted above, since each party
subject to ``joint and several'' liability is separately liable for the
aggregate amount, the aggregate amount must be reported for each party.
For instance, if two parties have ``joint and several'' liability for
$40,000, the amount reported would be $40,000 for each party.
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    \43\ CAI, Cutter, FSI, NAIBD, Northwestern, NSCP, Schwab and
SIFMA.
    \44\ Schwab.
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    Some commenters are also concerned that it may be too difficult to
obtain information from former associated persons.\45\ As discussed
above, in general, firms should report the information in their
custody, possession, or control or to which they have knowledge and
provide an explanation in the appropriate reporting system fields of
the information that they were unable to obtain due to circumstances
beyond their control, with the understanding that firms cannot
intentionally avoid becoming aware of a reportable event.
---------------------------------------------------------------------------

    \45\ CAI, FSI, Northwestern and NSCP.
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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 up to 90 days (i) as the
Commission may designate 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 the 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-2010-034 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-2010-034. 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, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street, NE., Washington, DC 20549, on official business days between
the hours of 10 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-2010-034
and should be submitted on or before August 30, 2010.
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    \46\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-19505 Filed 8-6-10; 8:45 am]
BILLING CODE 8010-01-P