[Federal Register Volume 78, Number 204 (Tuesday, October 22, 2013)]
[Notices]
[Pages 62831-62834]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-24568]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70612; File No. SR-FINRA-2013-025]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change, as Modified by Amendment No. 1, To Adopt Rules
Regarding Supervision in the Consolidated FINRA Rulebook
October 4, 2013.
I. Introduction
On June 21, 2013, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to adopt consolidated FINRA
supervision rules.\3\ The proposed rule change was published for
comment in the Federal Register on July 8, 2013.\4\ The Commission
received seventeen (17) individual comment letters in response to the
proposed rule change and five hundred fifty five (555) submissions of a
form comment letter (``Letter Type A'').\5\ On August 22, 2013, FINRA
extended the time period in which the Commission must approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to approve or disapprove the proposed
rule change to October 4, 2013. On October 2, 2013, FINRA responded to
the comments \6\ and filed Amendment No. 1 to the proposed rule change.
The Commission is publishing this notice
[[Page 62832]]
and order to solicit comments on Amendment No. 1 from interested
persons and to institute proceedings pursuant to Section 19(b)(2)(B) of
the Act \7\ to determine whether to approve or disapprove the proposed
rule change, as modified by Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On June 10, 2011, FINRA filed with the SEC a proposed rule
change to adopt the consolidated FINRA supervision rules (``Initial
Filing''), which addressed the comments received in response to
FINRA's Regulatory Notice 08-24. See Securities Exchange Act Release
No. 64736 (June 23, 2011), 76 FR 38245 (June 29, 2011) (File No. SR-
FINRA-2011-028). FINRA withdrew the Initial Filing on September 27,
2011. See Securities Exchange Act Release No. 65477 (October 4,
2011), 76 FR 62890 (October 11, 2011) (Notice of Withdrawal of File
No. SR-FINRA-2011-028).
\4\ See Exchange Act Release No. 69902 (July 1, 2013), 78 FR
40792 (July 8, 2013) (Notice of Filing of a Proposed Rule Change to
Adopt Rules Regarding Supervision in the Consolidated FINRA
Rulebook) (``Notice of Filing''). The comment period closed on July
29, 2013.
\5\ Letters from Steven B. Caruso, Esq., Maddox Hargett Caruso,
P.C., to Elizabeth M. Murphy, Secretary, SEC, dated July 12, 2013
(``Caruso''); Norman B. Arnoff, Esq., to Elizabeth M. Murphy,
Secretary, SEC, dated July 19, 2013 (``Arnoff''); J.S.
Brandenburger, Registered Principal, FSC Securities Corporation, to
Elizabeth M. Murphy, Secretary, SEC, dated July 25, 2013
(``Brandenburger''); Steve Putnam, Financial Advisor, Raymond James
Financial Services, to Elizabeth M. Murphy, Secretary, SEC, dated
July 25, 2013 (``Putnam''); Nina Schloesser McKenna, General
Counsel, Cetera Financial Group, Inc., to Elizabeth M. Murphy,
Secretary, SEC, dated July 29, 2013 (``Cetera''); Scott Cook, Senior
Vice President, Chief Compliance Officer, Charles Schwab & Co.,
Inc., to Elizabeth M. Murphy, Secretary, SEC, dated July 29, 2013
(``Schwab''); Clifford Kirsch and Eric A. Arnold, Sutherland Asbill
& Brennan LLP, on behalf of the Committee of Annuity Insurers, to
Elizabeth M. Murphy, Secretary, SEC, dated July 29, 2013 (``CAI'');
David T. Bellaire, Esq., Executive Vice President & General Counsel,
Financial Services Institute, to Elizabeth M. Murphy, Secretary,
SEC, dated July 29, 2013 (``FSI''); Howard Spindel, Senior Managing
Director, and Cassondra E. Joseph, Managing Director, Integrated
Management Solutions USA, LLC, to Elizabeth M. Murphy, Secretary,
SEC, dated July 29, 2013 (``IMS''); Tamara K. Salmon, Senior
Associate Counsel, Investment Company Institute, to Elizabeth M.
Murphy, Secretary, SEC, dated July 29, 2013 (``ICI''); Susanne
Denby, Chief Compliance Officer, NFP Securities, Inc., to Elizabeth
M. Murphy, Secretary, SEC, dated July 29, 2013 (``NFP''); A. Heath
Abshure, President and Arkansas Securities Commissioner, North
American Securities Administrators Association, Inc., to Elizabeth
M. Murphy, Secretary, SEC, dated August 6, 2013 (``NASAA''); Scott
C. Ilgenfritz, President, Public Investors Arbitration Bar
Association, to Elizabeth M. Murphy, Secretary, SEC, dated July 29,
2013 (``PIABA''); Ira D. Hammerman, Senior Managing Director and
General Counsel, Securities Industry and Financial Markets
Association, to Elizabeth M. Murphy, Secretary, SEC, dated July 29,
2013 (``SIFMA''); Pamela Albanese, Legal Intern, and Christine
Lazaro, Esq., Acting Director, Securities Arbitration Clinic of St.
John's University School of Law, to Elizabeth M. Murphy, Secretary,
SEC, dated July 29, 2013 (``St. John's''); Brian P. Sweeney, Law
Office of Brian P. Sweeney, to Elizabeth M. Murphy, Secretary, SEC,
dated July 29, 2013 (``Sweeney''); Robert J. McCarthy, Director of
Regulatory Policy, Wells Fargo Advisors, LLC, to Elizabeth M.
Murphy, Secretary, SEC, dated July 29 2013 (``Wells Fargo''); see
also Memorandum from the Division of Trading and Markets, SEC, dated
August 29, 2013 (memorializing an August 5, 2013 conference call
between SEC staff and Gary Goldsholle and Michael Post of the
Municipal Securities Rulemaking Board (``MSRB'') (``MSRB Memo'') to
discuss FINRA's recently proposed rule change to adopt the proposed
consolidated supervision rules).
\6\ See Letter from Patricia Albrecht, Assistant General
Counsel, FINRA, to Elizabeth M. Murphy, Secretary, Commission, dated
October 2, 2013 (``Response'').
\7\ 15 U.S.C. 78s(b)(2)(B).
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Institution of proceedings does not indicate that the Commission
has reached any conclusions with respect to the proposed rule change,
nor does it mean that the Commission will ultimately disapprove the
proposed rule change. Rather, as discussed below, the Commission seeks
additional input from interested parties on the changes to the proposed
rule change, as set forth in Amendment No. 1.
II. Description of the Proposed Rule Change and Summary of Comments
As further described in the Notice of Filing, FINRA proposes to
adopt consolidated FINRA broker-dealer supervision rules. As part of
the process of developing a new consolidated rulebook (``Consolidated
FINRA Rulebook''),\8\ the proposed rule change would (1) adopt FINRA
Rules 3110 (Supervision) and 3120 (Supervisory Control System) to
largely replace NASD Rules 3010 (Supervision) and 3012 (Supervisory
Control System), respectively; (2) incorporate into FINRA Rule 3110 and
its supplementary material the requirements of NASD IM-1000-4 (Branch
Offices and Offices of Supervisory Jurisdiction), NASD IM-3010-1
(Standards for Reasonable Review), Incorporated NYSE Rule 401A
(Customer Complaints), and Incorporated NYSE Rule 342.21 (Trade Review
and Investigation); (3) replace NASD Rule 3010(b)(2) (often referred to
as the ``Taping Rule'') with new FINRA Rule 3170 (Tape Recording of
Registered Persons by Certain Firms); (4) replace NASD Rule 3110(i)
(Holding of Customer Mail) with new FINRA Rule 3150 (Holding of
Customer Mail); and (5) delete the following Incorporated NYSE Rules
and NYSE Rule Interpretations: (i) NYSE Rule 342 (Offices--Approval,
Supervision and Control) and related NYSE Rule Interpretations; (ii)
NYSE Rule 343 (Offices--Sole Tenancy, and Hours) and related NYSE Rule
Interpretations; (iii) NYSE Rule 351(e) (Reporting Requirements) and
NYSE Rule Interpretation 351(e)/01 (Reports of Investigation); (iv)
NYSE Rule 354 (Reports to Control Persons); and (v) NYSE Rule 401
(Business Conduct).
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\8\ The current FINRA rulebook consists of: (1) FINRA Rules; (2)
NASD Rules; and (3) rules incorporated from the New York Stock
Exchange (``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. 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).
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In general, the commenters to the Notice of Filing supported the
proposal. Commenters, however, raised concerns regarding various
aspects of the proposed rules, including, among others:
References to MSRB rules; \9\
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\9\ ICI. See also MSRB Memo.
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the scope of the definition of the term ``covered
accounts''; \10\
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\10\ Brandenburger, CAI, FSI, ICI, IMS, Letter Type A, Putnam,
SIFMA.
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application of a risk-based approach; \11\
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\11\ Cetera, ICI, IMS, SIFMA.
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the conditions for establishing a one person office of
supervisory jurisdiction (``OSJ''); \12\
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\12\ Brandenburger, Cetera, IMS, Letter Type A, Putnam.
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the requirements and presumptions relating to a single
principal supervising multiple OSJs; \13\
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\13\ CAI, Cetera, FSI, IMS, Wells Fargo.
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the documentation requirements relating to written and
oral complaints; \14\ and
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\14\ Caruso, NASAA, PIABA, St John's.
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the lack of a cost benefit analysis.\15\
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\15\ Brandenburger, FSI, IMS, Letter Type A, Putnam.
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FINRA addressed many of these comments by modifying the proposed
rules in Amendment No. 1, as described below. Additionally, FINRA
responded to these and other comments in its Response.\16\
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\16\ See supra, note 6.
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III. Description of Amendment No. 1
FINRA's proposed changes in response to comments, as set forth in
Amendment No. 1 are summarized below.
First, FINRA is proposing to delete the references to MSRB rules in
proposed FINRA Rules 3110(a), (b)(1), (b)(4), (b)(6), (b)(7), (c)(1),
3110.06, 3110.12, 3120(a)(1), 3150(c), and 3170(b)(3) in light of a
member's separate obligation to comply with MSRB Rule G-27
(Supervision).
Second, FINRA is proposing to delete proposed FINRA Rule 3110.03
(One-Person OSJs), which expressly provided that the registered
principal at a one-person OSJ (``on-site principal'') must be under the
effective supervision and control of another appropriately registered
principal (referred to as a ``senior principal'') who would be
responsible for conducting on-site supervision of the one-person OSJ on
a regular periodic schedule to be determined by the member.\17\ The
proposed supplementary material required that the designated senior
principal be responsible for supervising the activities of the on-site
principal at the one-person OSJ and conduct on-site supervision of the
one-person OSJ on a regular periodic schedule to be determined by the
member. FINRA believes that OSJs conduct critical functions and one-
person OSJs present unique supervisory challenges. However, FINRA has
decided the best course is to eliminate the proposed supplementary
material from the proposed rule. Importantly, FINRA believes that one-
person OSJ locations where the on-site principal engages in sales-
related activities that trigger OSJ designation should be subject to
scrutiny, and firms should conduct focused reviews of such locations
because of the possible conflicts of interest that may arise.
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\17\ The deletion of this proposed supplementary material has
resulted in a change in numbering of the remaining supplementary
material to proposed FINRA Rule 3110. For ease of reference, the
description of the proposed changes in Amendment No. 1 employs the
new proposed numbers in all instances.
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Third, FINRA is proposing to revise proposed FINRA Rule 3110.03
(Supervision of Multiple OSJs by a Single Principal) to use the term
``on-site principal'' consistently throughout the provision. As
originally proposed, FINRA Rule 3110.03 used the terms ``on-site
supervisor'' and ``designated principal'' interchangeably throughout
the provision; however, FINRA clarified in the rule filing that the two
terms referred to one person. Also, FINRA is proposing to revise
proposed FINRA Rule 3110.03 to replace the presumption that assigning
one principal to be the on-site principal at more than two OSJs is
unreasonable with a general statement that assigning a principal to
more than one OSJ will be subject to scrutiny.
Fourth, FINRA is proposing to amend proposed FINRA Rule 3110.05
(Risk-based Review of Member's Investment Banking and Securities
Business) to clarify that a member is not required to conduct detailed
reviews of each transaction required to be reviewed pursuant to
proposed FINRA Rule 3110(b)(2) (Review of Member's Investment Banking
and Securities Business) if a member is using a reasonably designed
risk-based review system that provides a member with sufficient
information that permits the member to focus on the areas that pose
[[Page 62833]]
the greatest numbers and risks of violation.
Fifth, FINRA is proposing to replace the term ``correspondence with
the public'' used in proposed FINRA Rules 3110(b)(4) (Review of
Correspondence and Internal Communications), 3110.06 (Risk-based Review
of Correspondence and Internal Communications), 3110.07 (Evidence of
Review of Correspondence and Internal Communications), and 3110.08
(Delegation of Correspondence and Internal Communication Review
Functions) with ``correspondence'' to be consistent with FINRA Rule
2210's (Communications with the Public) definition and use of the term
``correspondence.''
Sixth, FINRA is proposing to revise proposed FINRA Rule
3110(b)(6)(D) to clarify that the provision does not create a strict
liability obligation requiring identification and elimination of all
conflicts of interest with respect to an associated person being
supervised by a member's supervisory personnel. As revised, proposed
FINRA Rule 3110(b)(6)(D) requires that a member have procedures
reasonably designed to prevent the supervisory system required pursuant
to proposed FINRA Rule 3110(a) from being compromised due to the
conflicts of interest that may be present with respect to the
associated person being supervised, including the position of such
person, the revenue such person generates for the firm, or any
compensation that a supervisor may derive from an associated person
being supervised.
Seventh, FINRA is proposing to revise proposed FINRA Rule
3110(c)(2)(D) to require a member to: (1) Identify in its written
supervisory procedures or in the location's written inspection report
the activities enumerated in FINRA Rule 3110(c)(2)(A) that the member
does not engage in at a particular location; and (2) document in its
written supervisory procedures or within that location's written
inspection report that supervisory policies and procedures must be in
place for those enumerated activities at that location before the
member can engage in them. As initially proposed, members would have
been required to identify such activities in a location's written
inspection report; thus, the proposed revisions provide firms with
additional flexibility in complying with proposed FINRA Rule
3110(c)(2)(D).
Eighth, FINRA is proposing to revise proposed FINRA Rule
3110(c)(3)(A) to clarify that the provision does not create a strict
liability obligation requiring identification and elimination of all
conflicts of interest with respect to a location's inspections. As
revised, proposed FINRA Rule 3110(c)(3)(A) requires that a member have
procedures reasonably designed to prevent the effectiveness of the
inspections required pursuant to proposed FINRA Rule 3110(c)(1) from
being compromised due to the conflicts of interest that may be present
with respect to the location being inspected, including but not limited
to, economic, commercial, or financial interests in the associated
persons and businesses being inspected.
Ninth, FINRA is proposing to revise proposed FINRA Rules 3110.10
(Supervision of Supervisory Personnel) and 3110.14 (Exception to
Persons Prohibited from Conducting Inspections) to delete the term
``only'' in both supplementary materials, to further clarify that the
provisions provide non-exclusive examples of situations where the
exceptions generally would apply.
Tenth, FINRA is proposing to revise the definition of ``covered
account'' in proposed FINRA Rule 3110(d) (Transaction Review and
Investigation) to align the definition with existing NYSE guidance.
Under the revised definition, ``covered account'' would include any
account introduced or carried by the member that is held by: (1) The
spouse of a person associated with the member; (2) a child of the
person associated with the member or such person's spouse, provided
that the child resides in the same household as or is financially
dependent upon the person associated with the member; (3) any other
related individual over whose account the person associated with the
member has control; or (4) any other individual over whose account the
associated person of the member has control and to whose financial
support such person materially contributes. FINRA also is proposing to
revise proposed FINRA Rule 3110(d) to include the phrase ``reasonably
designed'' to acknowledge more clearly that firms with different
business models may adopt different procedures and practices. As
amended, the proposed rule requires each member to ``include in its
supervisory procedures a process for the review of securities
transactions reasonably designed to identify trades that may violate
the provisions of the Exchange Act, the rules thereunder, or FINRA
rules prohibiting insider trading and manipulative and deceptive
devices.''
Eleventh, proposed FINRA Rule 3120 (Supervisory Control System)
requires a member to test and verify the member's supervisory
procedures and prepare and submit to the member's senior management a
report at least annually summarizing the test results and any necessary
amendments to those procedures. The proposed rule also requires a
member that reported $200 million or more in gross revenue on its FOCUS
reports in the prior calendar year to include additional content in the
report it submits to senior management. FINRA is proposing to revise
proposed FINRA Rule 3120(b) to clarify that a member complying with the
additional content requirement must include the additional content in
its report only to the extent applicable to the member's business.
IV. Proceedings To Determine Whether To Approve or Disapprove SR-FINRA-
2013-025 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act to determine whether the proposed rule change
should be approved or disapproved.\18\ Institution of such proceedings
appears appropriate at this time in view of the legal and policy issues
raised by the proposal. As noted above, institution of proceedings does
not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, the Commission seeks and
encourages interested persons to comment on the changes to the proposed
rule change as set forth in Amendment No. 1 and provide the Commission
with arguments to support the Commission's analysis as to whether to
approve or disapprove the proposal, as amended.
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\18\ 15 U.S.C. 78s(b)(2). Section 19(b)(2)(B) of the Act
provides that proceedings to determine whether to disapprove a
proposed rule change must be concluded within 180 days of the date
of publication of notice of the filing of the proposed rule change.
The time for conclusion of the proceedings may be extended for up to
an additional 60 days if the Commission finds good cause for such
extension and publishes its reasons for so finding or if the self-
regulatory organization consents to the extension.
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Pursuant to Section 19(b)(2)(B) of the Exchange Act,\19\ the
Commission is providing notice of the grounds for disapproval under
consideration. In particular, Section 15A(b)(6) of the Exchange Act
\20\ 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. In addition, Section 15A(b)(9) of
the Exchange Act \21\ requires that FINRA rules not impose any
unnecessary or inappropriate burden on competition.
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\19\ 15 U.S.C. 78s(b)(2)(B).
\20\ 15 U.S.C. 78o-3(b)(6).
\21\ 15 U.S.C. 78o-3(b)(9).
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The Commission believes FINRA's proposed rule change, as amended,
raises questions as to whether it is consistent with the requirements
of Section 15A(b)(6) and 15A(b)(9) of the Exchange Act.
V. Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
changes to the proposed rule change as set forth in Amendment No. 1, as
well as any others they may have identified with the proposed rule
change, as amended. In particular, the Commission invites the written
views of interested persons concerning whether the proposed rule
change, as modified by Amendment No. 1, is inconsistent with Section
15A(b)(6) or any other provision of the Exchange Act, or the rules and
regulations thereunder.
Although there do not appear to be any issues relevant to approval
or disapproval which would be facilitated by an oral presentation of
views, data, and arguments, the Commission will consider, pursuant to
Rule 19b-4, any request for an opportunity to make an oral
presentation.\22\ Interested persons are invited to submit written
data, views, and arguments by October 28, 2013 concerning Amendment No.
1 and regarding whether the proposed rule change, as modified by
Amendment No. 1, should be approved or disapproved. Any person who
wishes to file a rebuttal to any other person's submission must file
that rebuttal by November 12, 2013. Comments may be submitted by any of
the following methods:
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\22\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Acts Amendments of 1975, Pub. L. 94-29, 89 Stat. 97
(1975), grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Acts Amendments of
1975, Report of the Senate Committee on Banking, Housing and Urban
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess.
30 (1975).
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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-FINRA-2013-025 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-2013-025. 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 principle 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-2013-025 and
should be submitted on or before October 28, 2013. If comments are
received, any rebuttal comments should be submitted by November 12,
2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24568 Filed 10-21-13; 8:45 am]
BILLING CODE 8011-01-P