[Federal Register Volume 79, Number 102 (Wednesday, May 28, 2014)]
[Notices]
[Pages 30675-30678]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-12226]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72208; File No. SR-FINRA-2014-023]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Adopt FINRA Rule 2121 (Fair Prices and
Commissions), Supplementary Material .01 (Mark-Up Policy) and
Supplementary Material .02 (Additional Mark-Up Policy For Transactions
in Debt Securities, Except Municipal Securities) in the Consolidated
FINRA Rulebook
May 21, 2014.
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 May 9, 2014, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been substantially prepared by
FINRA. FINRA has designated the proposed rule change as constituting a
``non-controversial'' rule change under paragraph (f)(6) of Rule 19b-4
under the Act,\3\ which renders the proposal effective upon receipt of
this filing by the Commission. The Commission is publishing this notice
to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to adopt current NASD Rule 2440 and Interpretive
Material (``IM'') 2440-1 and IM-2440-2 as FINRA Rule 2121 (Fair Prices
and Commissions), Supplementary Material .01 (Mark-Up Policy) and
[[Page 30676]]
Supplementary Material .02 (Additional Mark-Up Policy For Transactions
in Debt Securities, Except Municipal Securities) without any
substantive changes. FINRA also proposes to update references and
cross-references within Supplementary Material .01 and .02, and in
other FINRA rules accordingly.\4\
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\4\ The text of FINRA Rule 3170, which contains a cross-
reference to NASD Rule 2440 that will be updated as part of this
proposal, was approved by the SEC on December 23, 2013. (See
Securities Exchange Act Release No. 71179 (December 23, 2013); 78 FR
79542 (December 30, 2013) (Order Approving SR-FINRA-2013-025)). The
effective date for this rule is December 1, 2014.
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Below is the text of the proposed rule change. Proposed new
language is in italics; proposed deletions are in brackets.
* * * * *
Text of Proposed New FINRA Rules (Marked to Show Changes From NASD Rule
2440, IM-2440-1 and IM-2440-2; NASD Rule 2440, IM-2440-1 and IM-2440-2
to be Deleted in Their Entirety)
* * * * *
2000. Duties and Conflicts
* * * * *
2100. Transactions With Customers
* * * * *
2120. Commissions, Mark Ups and Charges
[2440.] 2121. Fair Prices and Commissions
No Change.
Supplementary Material:
[IM-2440-1.] .01 Mark-Up Policy
The question of fair mark-ups or spreads is one which has been
raised from the earliest days of the National Association of
Securities Dealers (``Association''). No definitive answer can be
given and no interpretation can be all-inclusive for the obvious
reason that what might be considered fair in one transaction could
be unfair in another transaction because of different circumstances.
In 1943, the Association's Board adopted what has become known as
the ``5% Policy'' to be applied to transactions executed for
customers. It was based upon studies demonstrating that the large
majority of customer transactions were effected at a mark-up of 5%
or less. The Policy has been reviewed by the Board of Governors on
numerous occasions and each time the Board has reaffirmed the
philosophy expressed in 1943. Pursuant thereto, and in accordance
with Article VII, Section 1(a)(ii) of the By-Laws, the Board [has]
adopted the following interpretation [under Rule 2440.]
It shall be deemed a violation of Rule [2110] 2010 and Rule
[2440] 2121 for a member to enter into any transaction with a
customer in any security at any price not reasonably related to the
current market price of the security or to charge a commission which
is not reasonable.
(a) through (d) No Change.
* * * * *
[IM-2440-2.] .02 Additional Mark-Up Policy For Transactions in Debt
Securities, Except Municipal Securities \1\
(a) Scope
[(1) IM-2440-1] Supplementary Material .01 to Rule 2121 applies
to debt securities transactions, and this [IM-2440-2] Supplementary
Material .02 supplements the guidance provided in [IM-2440-1]
Supplementary Material .01.
(b) Prevailing Market Price
(1) A dealer that is acting in a principal capacity in a
transaction with a customer and is charging a mark-up or mark-down
must mark-up or mark-down the transaction from the prevailing market
price. Presumptively for purposes of this [IM-2440-2] Supplementary
Material .02, the prevailing market price for a debt security is
established by referring to the dealer's contemporaneous cost as
incurred, or contemporaneous proceeds as obtained, consistent with
[NASD] FINRA pricing rules. (See, e.g., Rule [2320] 5310.)
(2) through (6) No Change.
(7) Finally, if information concerning the prevailing market
price of the subject security cannot be obtained by applying any of
the above factors, [NASD] FINRA or its members may consider as a
factor in assessing the prevailing market price of a debt security
the prices or yields derived from economic models (e.g., discounted
cash flow models) that take into account measures such as credit
quality, interest rates, industry sector, time to maturity, call
provisions and any other embedded options, coupon rate, and face
value; and consider all applicable pricing terms and conventions
(e.g., coupon frequency and accrual methods). Such models currently
may be in use by bond dealers or may be specifically developed by
regulators for surveillance purposes.
(8) No Change.
(9) ``Customer,'' for purposes of Rule [2440] 2121, [IM-2440-1]
Supplementary Material .01 to Rule 2121 and this [IM-2440-2]
Supplementary Material .02, shall not include a qualified
institutional buyer (``QIB'') as defined in Rule 144A under the
Securities Act of 1933 that is purchasing or selling a non-
investment grade debt security when the dealer has determined, after
considering the factors set forth in [IM-2310-3] Rule 2111(b), that
the QIB has the capacity to evaluate independently the investment
risk and in fact is exercising independent judgment in deciding to
enter into the transaction. For purposes of Rule [2440] 2121, [IM-
2440-1] Supplementary Material .01 to Rule 2121 and this [IM-2440-2]
Supplementary Material .02, ``non-investment grade debt security''
means a debt security that: (i) If rated by only one nationally
recognized statistical rating organization (``NRSRO''), is rated
lower than one of the four highest generic rating categories; (ii)
if rated by more than one NRSRO, is rated lower than one of the four
highest generic rating categories by any of the NRSROs; or (iii) if
unrated, either was analyzed as a non-investment grade debt security
by the dealer and the dealer retains credit evaluation documentation
and demonstrates to [NASD] FINRA (using credit evaluation or other
demonstrable criteria) that the credit quality of the security is,
in fact, equivalent to a non-investment grade debt security, or was
initially offered and sold and continues to be offered and sold
pursuant to an exemption from registration under the Securities Act
of 1933.
(c) ``Similar'' Securities
(1) No Change.
(2) The degree to which a security is ``similar,'' as that term
is used in this [IM-2440-2] Supplementary Material .02, to the
subject security may be determined by factors that include but are
not limited to the following:
(A) through (D) No Change.
(3) No Change.
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\1\ No Change.
* * * * *
3000. Supervision and Responsibilities Relating to Associated Persons
3100. Supervisory Responsibilities
* * * * *
3170. Tape Recording of Registered Persons by Certain Firms
(a) Definitions
(1) through (2) No Change.
(3) For purposes of this Rule, the term ``disciplinary history''
means a finding of a violation by a registered person in the past
five years by the SEC, a self-regulatory organization, or a foreign
financial regulatory authority of one or more of the following
provisions (or comparable foreign provision) or rules or regulations
thereunder: Violations of the types enumerated in Exchange Act
Section 15(b)(4)(E); Exchange Act Section 15(c); Securities Act
Section 17(a); SEA Rules 10b-5 and 15g-1 through 15g-9; NASD Rule
2110 (Standards of Commercial Honor and Principles of Trade) or
FINRA Rule 2010 (Standards of Commercial Honor and Principles of
Trade) (only if the finding of a violation of NASD Rule 2110 or
FINRA Rule 2010 is for unauthorized trading, churning, conversion,
material misrepresentations or omissions to a customer,
frontrunning, trading ahead of research reports or excessive
markups), FINRA Rule 5280 (Trading Ahead of Research Reports), NASD
Rule 2120 (Use of Manipulative, Deceptive or Other Fraudulent
Devices) or FINRA Rule 2020 (Use of Manipulative, Deceptive or Other
Fraudulent Devices), NASD Rule 2310 (Recommendations to Customers
(Suitability)) or FINRA Rule 2111 (Suitability), NASD Rule 2330
(Customers' Securities or Funds) or FINRA Rule 2150 (Improper Use of
Customers' Securities or Funds; Prohibition Against Guarantees and
Sharing in Accounts), NASD Rule 2440 or FINRA Rule 2121 (Fair Prices
and Commissions), NASD Rule 3010 (Supervision) or FINRA Rule 3110
(Supervision) (failure to supervise only for both NASD Rule 3010 and
FINRA Rule 3110), NASD Rule 3310 (Publication of Transactions and
Quotations) or FINRA Rule 5210 (Publication of Transactions and
Quotations), and NASD Rule 3330 (Payment Designed to Influence
Market Prices, Other
[[Page 30677]]
than Paid Advertising) or FINRA Rule 5230 (Payments Involving
Publications that Influence the Market Price of a Security); and
MSRB Rules G-19, G-30, and G-37(b) & (c).
(4) through (5) No Change.
(b) through (d) No Change.
* * * * *
5000. Securities Offering and Trading Standards and Practices
* * * * *
5300. Handling of Customer Orders
5310. Best Execution and Interpositioning
(a) through (d) No Change.
(e) The obligations described in paragraphs (a) through (d)
above exist not only where the member acts as agent for the account
of its customer but also where transactions are executed as
principal. Such obligations are distinct from the reasonableness of
commission rates, markups or markdowns, which are governed by [NASD
Rule 2440 and IM-2440] Rule 2121 and its Supplementary Material.
Supplementary Material
.01 through .09 No Change.
* * * * *
6000. Quotation and Transaction Reporting Facilities
* * * * *
6600. OTC Reporting Facility
* * * * *
6630. Applicability of FINRA Rules to Securities Previously Designated
as PORTAL Securities
(a) The following are specifically applicable to transactions
and business activities relating to securities that, prior to
October 26, 2009, had been designated by The Nasdaq Stock Market LLC
for inclusion in the PORTAL Market (``PORTAL securities''):
(1) [NASD Rule 2440, and] FINRA Rules 0130, 0140, 2010, 2020,
2111, 2121, 2232, 2251, 2261, 2262, 2269, 5310, 8210;
(2) No Change.
(3) FINRA Rules 5210, 5220, Supplementary Material to Rule 2121,
and NASD IM-2420-1[, IM-2440-1, and IM-2440-2].
(b) through (d) No Change.
* * * * *
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''),\5\ FINRA is proposing to transfer
NASD Rule 2440 (Fair Prices and Commissions) into the Consolidated
FINRA Rulebook as FINRA Rule 2121. NASD Rule 2440 provides that for
securities transactions in both listed and unlisted securities a member
that buys for his own account from his customer, or sells for his own
account to his customer, shall buy or sell at a price that is fair
taking into consideration all relevant circumstances, including market
conditions with respect to such security at the time of the
transaction, the expense involved, and the fact that it is entitled to
a profit.\6\ Further, if the member acts as agent for its customer in
any such transaction, that member shall not charge its customer more
than a fair commission or service charge, taking into consideration all
relevant circumstances, including market conditions with respect to
such security at the time of the transaction, the expense of executing
the order, and the value of any service he may have rendered by reason
of his experience in and knowledge of such security and the market
therefor.\7\ FINRA proposes to transfer this rule into the Consolidated
FINRA Rulebook without any substantive changes.\8\
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\5\ 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).
\6\ NASD Rule 2440.
\7\ NASD Rule 2440.
\8\ FINRA previously has solicited comment on a proposal to move
NASD Rule 2440 to the FINRA rules with substantive changes. See
Regulatory Notice 11-08 (February 2011); see also Regulatory Notice
13-07 (January 2013). Given that these proposals raised complex
issues and FINRA would like to proceed with the rulebook
consolidation process expeditiously, FINRA is proposing in this rule
change to move Rule 2440 and its Interpretive Materials to the FINRA
rules without substantive changes, and will defer proposing any
substantive changes to the rule to a future rule proposal.
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With NASD Rule 2440, FINRA also is proposing to transfer IM-2440-1
(Mark-Up Policy) and IM-2440-2 (Additional Mark-Up Policy For
Transactions in Debt Securities, Except Municipal Securities) as
Supplementary Material .01 and .02, respectively. IM-2440-1 provides
additional guidance as to what may constitute a fair price or spread;
IM-2440-2 provides additional guidance for mark-ups related to
transactions in debt securities, except municipal securities. As with
NASD Rule 2440, FINRA proposes to transfer these Interpretive Materials
without any substantive changes.\9\
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\9\ In addition to transferring IM-2440-1 to Supplementary
Material .01, FINRA is changing the introductory language in IM-
2440-1, which describes the adoption of the interpretation set forth
in that provision, to reflect the historical nature of that
adoption.
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FINRA also is proposing to update references and cross-references
within Supplementary Material .01. Specifically, FINRA is clarifying
that the reference to ``Association'' in this Supplementary Material is
to the National Association of Securities Dealers. FINRA is updating
the reference in this Supplementary Material to NASD Rule 2110, which
is now FINRA Rule 2010. FINRA is also updating Supplementary Material
.02 to change references to NASD to FINRA, to update the reference to
NASD Rule 2320 to FINRA Rule 5310, and to update the reference to NASD
IM-2310-3 to FINRA Rule 2111(b).
FINRA also proposes to update other FINRA rules as necessary to
reflect the transfer of NASD Rule 2440 and its Interpretive Material to
FINRA Rule 2121 and its Supplementary Material.
FINRA has filed the proposed rule change for immediate
effectiveness.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\10\ 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 this proposed rule change, which
does not substantively change the rule, is consistent with the Act
because it is being undertaken pursuant to the rulebook consolidation
process, which is designed to provide additional clarity and regulatory
efficiency to FINRA members by consolidating the applicable NASD,
Incorporated NYSE, and FINRA rules into one rule set.
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\10\ 15 U.S.C. 78o-3(b)(6).
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[[Page 30678]]
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. As noted above, this proposal
will not substantively change either the text or the application of the
rule and its supporting material.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received with respect
to this proposal to transfer NASD Rule 2440 and its supporting
Interpretive Material into the Consolidated FINRA Rulebook without any
substantive changes.\11\
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\11\ But see note 8 supra.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) thereunder.\13\
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\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), FINRA provided the Commission with written notice of
its intention to file the proposed rule change at least five
business days prior to filing the proposal with the Commission or
such shorter period as designated by the Commission.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
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-FINRA-2014-023 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2014-023. 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
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of FINRA. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-FINRA-2014-023 and should be
submitted on or before June 18, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-12226 Filed 5-27-14; 8:45 am]
BILLING CODE 8011-01-P