Federal Register, Volume 80 Issue 243 (Friday, December 18, 2015)

[Federal Register Volume 80, Number 243 (Friday, December 18, 2015)]
[Notices]
[Pages 79112-79113]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-31789]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76639; File No. SR-FINRA-2015-033]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change To Amend FINRA
Rule 0150 To Apply FINRA Rule 2121 and its Supplementary Material .01
and .02 to Transactions in Exempted Securities That Are Government
Securities

December 14, 2015.

I. Introduction

On September 17, 2015, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to FINRA Rule 0150, Application
of Rules to Exempted Securities Except Municipal Securities, so that
FINRA Rule 2121 and its Supplementary Material .01 and .02, which
govern mark-ups and commissions, will apply to transactions in exempted
securities that are government securities. The proposed amendment was
published for comment in the Federal Register on October 6, 2015.\3\ On
November 19, 2015, FINRA granted the Commission an extension of time,
until January 4, 2016 to act on the proposal.\4\ No comments were
received in response to the proposal. This order approves the rule
change as proposed.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Notice of Filing of a Proposed Rule Change to Amend
FINRA Rule 0150 to Apply FINRA Rule 2121 and its Supplementary
Material .01 and .02 to Transactions in Exempted Securities That Are
Government Securities; Exchange Act Release No. 76059 (September 30,
2015), 80 FR 60416 (October 6, 2015) (``Notice'').
\4\ See Letter from Andrew Madar, Associate General Counsel,
FINRA Regulatory Policy and Oversight, to Katherine England,
Assistant Director, Division of Trading and Markets, Securities and
Exchange Commission, dated November 19, 2015.
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II. Description of the Proposed Rule Change

A. Background

As stated in the Notice, FINRA is proposing to amend FINRA Rule
0150, which governs the application of FINRA rules and the rules of the
National Association of Securities Dealers (``NASD'') \5\ that apply to
transactions in, and business activities relating to, exempted
securities, except municipal securities, conducted by members and
associated persons.\6\ Current FINRA Rule 0150(c) specifically
enumerates these provisions and does not include reference to FINRA
Rule 2121, Supplementary Material .01, and Supplementary Material .02,
which govern mark-ups and commissions (``mark-up rule'').\7\ The
proposed amendment would incorporate the mark-up rule into FINRA Rule
0150 and extend its application to transactions in, and business
activities relating to, exempted securities that are government
securities, as defined in Section 3(a)(42) of the Exchange Act.\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 FINRA Information Notice, March 12, 2008 (Rulebook
Consolidation Process), available at https://www.finra.org/sites/default/files/NoticeDocument/p038121.pdf.
\6\ The terms exempted securities, municipal securities, and
government securities as used in this order are defined in Sections
3(a)(12), 3(a)(29), and 3(a)(42) of the Act, respectively.
\7\ NASD Rule 2440, IM-2440-1, and IM-2440-2 were recently moved
to the FINRA rules without any substantive changes, becoming FINRA
Rule 2121, Supplementary Material .01, and Supplementary Material
.02, respectively. See 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; Exchange Act Release No. 72208 (May 21,
2014), 79 FR 30675 (May 28, 2014).
\8\ This includes U.S. Treasury securities, as defined in FINRA
Rule 6710(p). See Notice at 60417, note 12.
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In the Notice, FINRA described the historical reasons for not
applying certain NASD rules, including the mark-up rule, to exempted
securities (except municipal securities). Prior to 1993, there were
statutory limitations on the NASD's ability to apply sales practice
rules, including the mark-up rules, to transactions in exempted
securities. The Government Securities Act Amendments of 1993 (``GSAA'')
\9\ eliminated the limitations on the authority of registered
securities associations over transactions by a registered broker or
dealer in an exempted security.\10\ Following the

[[Page 79113]]

GSAA, NASD proposed to apply certain NASD rules to exempted securities
other than to municipal securities but did not propose to apply the
mark-up rule then in effect to such securities.\11\ FINRA stated in the
Notice that the NASD believed at the time that actions for conduct
generally encompassed by the NASD mark-up rule in the government
securities market could be brought under NASD Rule 2110 (Standards of
Commercial Honor and Principles of Trade).\12\
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\9\ Government Securities Act Amendments of 1993, Pub. L. 103-
202, Sec. 106(b)(1), 107 Stat. 2344 (1993).
\10\ Specifically Section 15A(f) of the Act imposed limitations
on the authority of registered securities associations over
transactions by a registered broker or dealer in an exempted
security. This provision was eliminated as part of the GSAA. For
more information on the background of Section 15A(f), see Notice at
60417, note 5.
\11\ NASD Rule 2440 and IM-2440-1. See Notice at 60417. The NASD
stated at the time that it intended to review the specific
application of these rules to the government securities market and
that it was developing an interpretation of the mark-up rule with
respect to exempted securities and other debt securities.
\12\ See Notice at 60417, note 9. FINRA also described in the
Notice how NASD adopted NASD Rule 0116 (now FINRA Rule 0150) in
2001, setting forth the NASD rules that would apply to transactions
in exempted securities, except municipal securities and how the SEC
approved IM-2440-2, which set forth a mark-up policy for
transactions in debt securities, except municipal securities. See
id., notes 10-11.
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B. Purpose

FINRA believes that the proposal to extend FINRA Rule 0150 to apply
the mark-up rule to transactions in government securities is consistent
with both the GSAA and with the prior application by NASD of certain of
its rules, following the GSAA, to exempted securities other than
municipal securities.\13\
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\13\ See id. at 60417.
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FINRA also believes that there would be regulatory benefits from
amending FINRA Rule 0150 to apply the mark-up rule to transactions in
government securities. In the Notice, FINRA notes that it must use the
general provisions of FINRA Rule 2010 if FINRA staff wants to bring a
case alleging excessive mark-ups, mark-downs, or commissions in
transactions in exempted securities other than municipal securities,
such as agency debt securities or U.S. Treasury securities.\14\ FINRA
believes that the proposed amendment would provide it an additional
``specific cause of action under which conduct involving government
securities could be regulated'' and ``would clearly signal to members
that conduct relating to mark-ups and commissions in the market for
government securities directly implicates the mark-up rule.'' \15\
FINRA also noted that the mark-up rule provides ``specific criteria by
which members should assess debt mark-ups and mark-downs.'' FINRA
believes that amending Rule 0150 to apply these standards to
transactions in government securities would provide both members and
its staff with ``clearer standards by which to measure the propriety of
mark-ups, mark-downs, and commissions'' in transactions involving
government securities.\16\
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\14\ See id. at 60418.
\15\ Id.
\16\ Id.
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FINRA also believes that the proposed amendment would only have a
minimal impact on its members because FINRA Rule 2010 already applies
to these transactions.\17\ In addition, FINRA noted in the Notice that
while the proposal would extend the more specific requirements of the
mark-up rule to transactions in government securities, the provisions
are already applicable to corporate debt securities.\18\ Therefore,
FINRA members that currently engage in transactions in corporate debt
will be familiar with its application.\19\
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\17\ Id.
\18\ Id.
\19\ Id. FINRA also noted that it believes most firms apply
substantially similar standards to all transactions in fixed income
securities. Furthermore, FINRA does not believe that the proposed
amendments would impact the reporting or surveillance of
transactions in government securities because it already requires
its members to report transactions in many government securities
(i.e., agency debentures and agency asset backed securities) to its
Trade Reporting and Compliance Engine (``TRACE'') and it actively
surveils the markets in such securities. FINRA also noted that for
government securities that are not TRACE-eligible, such as U.S.
Treasury securities, any review of transactions pursuant to the
mark-up rule would not change. See Notice at 60418.
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III. Discussion and Commission Findings

After carefully considering the proposed rule, the Commission finds
that the proposed rule change is consistent with the requirements of
the Act and the rules and regulations thereunder applicable to a
national securities association.\20\ In particular, the Commission
finds that the proposed rule change is consistent with Section
15A(b)(6) of the Act, which requires, among other things, that FINRA's
rules 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.\21\ The
Commission notes that no comments were received in response to the
proposal.\22\
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\20\ In approving the proposed rule change, the Commission has
also considered the rule change's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\21\ 15 U.S.C. 78o-3(b)(6).
\22\ In 2013, FINRA sought comment on proposed rule changes
that, among other things, would have amended Rule 0150 to apply the
mark-up rule to certain government securities. No comments were
received on that aspect of the proposal. See Notice at 60419, note
18 for more information.
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As discussed above, the proposed rule change would expand the
applicability of the mark-up rule to exempted securities that are
government securities. The Commission notes that government securities
can be subject to excessive mark-ups and agrees that making more
explicit FINRA's authority over excessive and improper mark-ups, mark-
downs, or commissions relating to government securities will benefit
investors in government securities. While the Commission acknowledges
that FINRA Rule 2010 already applies to transactions in government
securities and instances of improper or excessive mark-ups, mark-downs,
and commissions, the Commission believes that expanding FINRA Rule 0150
to include the mark-up rule will give FINRA an important enforcement
tool with which to pursue instances of excessive mark-ups, mark-downs,
and commissions. The Commission also agrees with FINRA's belief that
applying the mark-up rule to these securities will provide members with
additional clarity when conducting transactions in government
securities.
Pursuant to Section 19(b)(5) of the Act,\23\ the Commission
consulted with and considered the views of the Department of the
Treasury (``Treasury'') in determining to approve the proposed rule
change.\24\ Treasury did not object to FINRA's proposal that the mark-
up rule be applied to government securities.\25\
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\23\ 15 U.S.C. 78s(b)(5).
\24\ Section 19(b)(5) of the Act states generally that the
Commission shall consult with and consider the views of the
Secretary of the Treasury prior to approving a proposed rule filed
by a registered securities association that primarily concerns
conduct related to transactions in government securities. See also
Notice at 60418, note 15.
\25\ Telephone conversation between Treasury staff and Lourdes
Gonzalez, Assistant Chief Counsel; Alicia Goldin, Senior Special
Counsel; and Stephen Benham, Special Counsel, Division of Trading
and Markets, Commission, on November 16, 2015.
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IV. Conclusion

IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the
Act,\26\ that the proposed rule change (SR-FINRA-2015-033), be, and
hereby is, approved.
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\26\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-31789 Filed 12-17-15; 8:45 am]
BILLING CODE 8011-01-P