81_FR_15644 81 FR 15588 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove Proposed Rule Change To Adopt FINRA Capital Acquisition Broker Rules

81 FR 15588 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove Proposed Rule Change To Adopt FINRA Capital Acquisition Broker Rules

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 56 (March 23, 2016)

Page Range15588-15596
FR Document2016-06453

Federal Register, Volume 81 Issue 56 (Wednesday, March 23, 2016)
[Federal Register Volume 81, Number 56 (Wednesday, March 23, 2016)]
[Notices]
[Pages 15588-15596]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-06453]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77391; File No. SR-FINRA-2015-054]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove Proposed Rule Change To Adopt FINRA Capital 
Acquisition Broker Rules

March 17, 2016.

I. Introduction

    On October 9, 2015, 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'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt rules for capital 
acquisition brokers (collectively, the ``CAB Rules''). The proposed 
rule change was published for comment in the Federal Register on 
December 23, 2015.\3\ The Commission received seventeen comment letters 
on the proposed rule change.\4\ On December 9, 2015, FINRA extended the 
time period for Commission action on this proposed rule change until 
March 22, 2016.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 76675 (Dec. 23, 2015), 80 FR 
79969 (``Notice'').
    \4\ See letters from Peter W. LaVigne, Esq., Chair, Securities 
Regulation Committee, Business Law Section, New York State Bar 
Association dated January 22, 2016 (``New York State Bar Association 
Letter''); Judith M. Shaw, President, North American Securities 
Administrators Association (``NASAA''), and Maine Securities 
Administrator, Washington, District of Columbia dated January 15, 
2016 (``NASAA Letter''); Michael S. Quinn, Member and CCO, Q 
Advisors dated January 13, 2016 (``Q Advisors Letter''); Howard 
Spindel, Senior Managing Director, and Cassondra E. Joseph, Managing 
Director, Integrated Management Solutions USA LLC dated January 13, 
2016 (``IMS Letter''); Lisa Roth, President, Monahan & Roth, LLC 
dated January 13, 2016 (``Roth Letter''); Mark Fairbanks, President, 
Foreside Distributors dated January 13, 2016 (``Foreside Letter''); 
Arne Rovell, Coronado Investments, LLC dated January 6, 2016 
(``Coronado Letter''); Daniel H. Kolber, President/CEO, Intellivest 
Securities, Inc. dated December 30, 2016 (``Intellivest Letter''); 
Roger W. Mehle, Washington, District of Columbia dated December 29, 
2015 (``Mehle Letter''); Donna B. DiMaria, Chairman of the Board of 
Directors, and Lisa Roth, Board of Directors, Third Party Marketers 
Association dated January 12, 2016 (``3PM Letter'') (letters 
supporting the 3PM letter: Sajan K. Thomas, President, and Stephen 
J. Myott, Chief Compliance Officer, Thomas Capital Group, Inc. dated 
January 13, 2016; Richard A. Murphy, North Bridge Capital LLC, 
Boston, Massachusetts dated January 13, 2016; Steven Jafarzadeh, 
CAIA, CCO, Stonehaven, New York dated January 13, 2016; Dan Glusker, 
Perkins Fund Marketing LLC dated January 13, 2016; Ron Oldenkamp, 
President, Genesis Marketing Group dated January 13, 2016; Timothy 
Cahill, President, Compass Securities Corporation dated January 13, 
2016; Frank P. L. Minard, Managing Partner, XT Capital Partners, LLC 
dated January 12, 2016).
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    The Commission is publishing this order to solicit comments on the 
proposed rule change and to institute proceedings pursuant to Exchange 
Act Section 19(b)(2)(B) \5\ to determine whether to approve or 
disapprove the proposed rule change.
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    \5\ 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 on the proposed rule change and issues presented by 
the proposal.

II. Description of the Proposed Rule Change \6\
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    \6\ The proposed rule change, as described in this Item II, is 
excerpted, in part, from the Notice, which was substantially 
prepared by FINRA. See supra note 3.
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    FINRA is proposing to create a separate rule set that would apply 
to firms that meet the definition of ``capital acquisition broker'' 
(``CAB'') and elect to be governed under this rule set. FINRA states 
that there are firms that are solely corporate financing firms that 
advise companies on mergers and acquisitions, advise issuers on raising 
debt and equity capital in private placements with institutional 
investors, or provide advisory services on a consulting basis to 
companies that need assistance analyzing their strategic and financial 
alternatives. These firms often are registered as broker-dealers 
because of their activities and because they may receive transaction-
based compensation as part of their services.
    Nevertheless, FINRA believes that these firms do not engage in many 
of the types of activities typically associated with traditional 
broker-dealers. For example, these firms typically do not carry or act 
as an introducing broker with respect to customer accounts, handle 
customer funds or securities, accept orders to purchase or sell 
securities either as principal or agent for the customer, exercise 
investment discretion on behalf of any customer, or engage in 
proprietary trading of securities or market-making activities.
    FINRA is proposing to establish a separate rule set that would 
apply exclusively to firms that meet the definition of ``capital 
acquisition broker'' and that elect to be governed under this rule set. 
CABs would be subject to the FINRA By-Laws, as well as core FINRA rules 
that FINRA believes

[[Page 15589]]

should apply to all firms. The rule set would also include other FINRA 
rules that are tailored to address CABs' business activities. A brief 
description of the proposed rule set for CABs is contained below.

A. General Standards

    Proposed CAB Rule 014 provides that all persons that have been 
approved for membership in FINRA as a CAB and persons associated with 
CABs shall be subject to the Capital Acquisition Broker rules and the 
FINRA By-Laws (including the schedules thereto), unless the context 
requires otherwise. Proposed CAB Rule 015 provides that FINRA Rule 
0150(b) shall apply to the CAB rules. FINRA Rule 0150(b) provides that 
the FINRA rules do not apply to transactions in, and business 
activities relating to, municipal securities as that term is defined in 
the Exchange Act.
    CAB Rule 016 sets forth basic definitions modified as appropriate 
to apply to CABs. The proposed definitions of ``capital acquisition 
broker'' and ``institutional investor'' are particularly important to 
the application of the rule set. The term ``capital acquisition 
broker'' would mean any broker that solely engages in any one or more 
of the following activities:

     advising an issuer, including a private fund, 
concerning its securities offerings or other capital raising 
activities;
     advising a company regarding its purchase or sale of a 
business or assets or regarding its corporate restructuring, 
including a going-private transaction, divestiture or merger;
     advising a company regarding its selection of an 
investment banker;
     assisting in the preparation of offering materials on 
behalf of an issuer;
     providing fairness opinions, valuation services, expert 
testimony, litigation support, and negotiation and structuring 
services;
     qualifying, identifying, soliciting, or acting as a 
placement agent or finder with respect to institutional investors in 
connection with purchases or sales of unregistered securities; and
     effecting securities transactions solely in connection 
with the transfer of ownership and control of a privately-held 
company through the purchase, sale, exchange, issuance, repurchase, 
or redemption of, or a business combination involving, securities or 
assets of the company, to a buyer that will actively operate the 
company or the business conducted with the assets of the company, in 
accordance with the terms and conditions of an SEC rule, release, 
interpretation or ``no-action'' letter that permits a person to 
engage in such activities without having to register as a broker or 
dealer pursuant to Section 15(b) of the Exchange Act.\7\

    \7\ See proposed CAB Rule 016(c)(1).
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    A firm would be permitted to register as, or change its status to, 
a CAB only if the firm solely engages in one or more of these 
activities.
    The term ``capital acquisition broker'' would not include any 
broker or dealer that:

     carries or acts as an introducing broker with respect 
to customer accounts;
     holds or handles customers' funds or securities;
     accepts orders from customers to purchase or sell 
securities either as principal or as agent for the customer (except 
as permitted by paragraphs (c)(1)(F) and (G) of CAB Rule 016);
     has investment discretion on behalf of any customer;
     engages in proprietary trading of securities or market-
making activities; or
     participates in or maintains an online platform in 
connection with offerings of unregistered securities pursuant to 
Regulation Crowdfunding or Regulation A under the Securities Act of 
1933.\8\

    \8\ See proposed CAB Rule 016(c)(2).
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    The term ``institutional investor'' would have the same meaning as 
that term has under FINRA Rule 2210 (Communications with the Public), 
with one exception. The term would include any:

     bank, savings and loan association, insurance company 
or registered investment company;
     governmental entity or subdivision thereof;
     employee benefit plan, or multiple employee benefit 
plans offered to employees of the same employer, that meet the 
requirements of Section 403(b) or Section 457 of the Internal 
Revenue Code and in the aggregate have at least 100 participants, 
but does not include any participant of such plans;
     qualified plan, as defined in Section 3(a)(12)(C) of 
the Exchange Act, or multiple qualified plans offered to employees 
of the same employer, that in the aggregate have at least 100 
participants, but does not include any participant of such plans;
     other person (whether a natural person, corporation, 
partnership, trust, family office or otherwise) with total assets of 
at least $50 million; and
     person acting solely on behalf of any such 
institutional investor.

    The definition also would include any person meeting the definition 
of ``qualified purchaser'' as that term is defined in Section 2(a)(51) 
of the Investment Company Act of 1940.\9\
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    \9\ See proposed CAB Rule 016(i). FINRA Rule 2210 does not 
include ``qualified purchaser'' within its definition of 
``institutional investor.''
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B. FINRA Membership

    The proposed CAB Rule 100 Series sets forth the requirements for 
firms that wish to register as a CAB. The proposed CAB Rule 100 Series 
generally incorporates by reference FINRA Rules 1010 (Electronic Filing 
Requirements for Uniform Forms), and 1122 (Filing of Misleading 
Information as to Membership or Registration), and NASD Rules 1011 
(Definitions), 1012 (General Provisions), 1013 (New Member Application 
and Interview), 1014 (Department Decision), 1015 (Review by National 
Adjudicatory Council), 1016 (Discretionary Review by FINRA Board), 1017 
(Application for Approval of Change in Ownership, Control, or Business 
Operations), 1019 (Application to Commission for Review), 1090 (Foreign 
Members), 1100 (Foreign Associates) and IM-1011-1 (Safe Harbor for 
Business Expansions). Accordingly, a CAB applicant would follow the 
same procedures for membership as any other FINRA applicant, with four 
modifications.
     First, an applicant for membership that seeks to qualify 
as a CAB would have to state in its application that it intends to 
operate solely as such.
     Second, in reviewing an application for membership as a 
CAB, the FINRA Member Regulation Department would consider, in addition 
to the standards for admission set forth in NASD Rule 1014, whether the 
applicant's proposed activities are consistent with the limitations 
imposed on CABs under CAB Rule 016(c).
     Third, proposed CAB Rule 116(b) sets forth the procedures 
for an existing FINRA firm to change its status to a CAB. If an 
existing firm is already approved to engage in the activities of a CAB, 
and the firm does not intend to change its existing ownership, control 
or business operations, it would not be required to file either a New 
Member Application (``NMA'') or a Change in Membership Application 
(``CMA''). Instead, such a firm would be required to file a request to 
amend its membership agreement or obtain a membership agreement (if 
none exists currently) to provide that: (i) The firm's activities will 
be limited to those permitted for CABs under CAB Rule 016(c), and (ii) 
the firm agrees to comply with the CAB rules.\10\
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    \10\ There would not be an application fee associated with this 
request.
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     Fourth, proposed CAB Rules 116(c) and (d) set forth the 
procedures for an existing CAB to terminate its status as such and 
continue as a FINRA firm. Under Rule 116(c), such a firm would be 
required to file a CMA with the FINRA Member Regulation Department, and 
to amend its membership agreement to

[[Page 15590]]

provide that the firm agrees to comply with all FINRA rules.\11\
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    \11\ Absent a waiver, such a firm would have to pay an 
application fee associated with the CMA. See FINRA By-Laws, Schedule 
A, Section 4(i).
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    Under Rule 116(d), however, if during the first year following an 
existing FINRA member firm's amendment to its membership agreement to 
convert a full-service broker-dealer to a CAB pursuant to Rule 116(b) a 
CAB seeks to terminate its status as such and continue as a FINRA 
member firm, the CAB may notify the FINRA Membership Application 
Program group of this change without having to file an application for 
approval of a material change in business operations pursuant to NASD 
Rule 1017. The CAB would instead file a request to amend its membership 
agreement to provide that the member firm agrees to comply with all 
FINRA rules, and execute an amended membership agreement that imposes 
the same limitations on the member firm's activities that existed prior 
to the member firm's change of status to a CAB.\12\
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    \12\ To the extent that the rules applicable to the member firm 
had been amended since it had changed its status to a CAB, FINRA 
would have the discretion to modify any limitations to reflect any 
new rule requirements.
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    The proposed CAB Rule 100 Series also would govern the registration 
and qualification examinations of principals and representatives that 
are associated with CABs. These Rules incorporate by reference NASD 
Rules 1021 (Registration Requirements--Principals), 1022 (Categories of 
Principal Registration), 1031 (Registration Requirements--
Representatives), 1032 (Categories of Representative Registration), 
1060 (Persons Exempt from Registration), 1070 (Qualification 
Examinations and Waiver of Requirements), 1080 (Confidentiality of 
Examinations), IM-1000-2 (Status of Persons Serving in the Armed Forces 
of the United States), IM-1000-3 (Failure to Register Personnel) and 
FINRA Rule 1250 (Continuing Education Requirements). Accordingly, CAB 
firm principals and representatives would be subject to the same 
registration, qualification examination, and continuing education 
requirements as principals and representatives of other FINRA firms. 
CABs also would be subject to FINRA Rule 1230(b)(6) regarding 
Operations Professional registration.

C. Duties and Conflicts (CAB Rule 200 Series)

    The proposed CAB Rule 200 Series would establish a streamlined set 
of conduct rules. CABs would be subject to FINRA Rules 2010 (Standards 
of Commercial Honor and Principles of Trade), 2020 (Use of 
Manipulative, Deceptive or Other Fraudulent Devices), 2040 (Payments to 
Unregistered Persons),\13\ 2070 (Transactions Involving FINRA 
Employees), 2080 (Obtaining an Order of Expungement of Customer Dispute 
Information from the CRD System), 2081 (Prohibited Conditions Relating 
to Expungement of Customer Dispute Information), 2263 (Arbitration 
Disclosure to Associated Persons Signing or Acknowledging Form U4), and 
2268 (Requirements When Using Predispute Arbitration Agreements for 
Customer Accounts).
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    \13\ The SEC has approved FINRA's rule change to adopt rules 
relating to payments to unregistered persons for the consolidated 
FINRA rulebook. See Regulatory Notice 15-07 (March 2015). FINRA Rule 
2040 became effective on August 24, 2015.
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    CAB Rules 209 and 211 would impose know-your-customer and 
suitability obligations similar to those imposed under FINRA Rules 2090 
and 2111. CAB Rule 211(b) includes an exception to the customer-
specific suitability obligations for institutional investors similar to 
the exception found in FINRA Rule 2111(b).
    Proposed CAB Rule 221 is an abbreviated version of FINRA Rule 2210 
(Communications with the Public), essentially prohibiting false and 
misleading statements.
    Under proposed CAB Rule 240, if a CAB or associated person of a CAB 
had engaged in activities that would require the CAB to register as a 
broker or dealer under the Exchange Act, and that are inconsistent with 
the limitations imposed on CABs under CAB Rule 016(c), FINRA could 
examine for and enforce all FINRA rules against such a broker or 
associated person, including any rule that applies to a FINRA broker-
dealer that is not a CAB or to an associated person who is not a person 
associated with a CAB.
    FINRA has determined not to subject CABs to FINRA Rules 2121 (Fair 
Prices and Commissions), 2122 (Charges for Services Performed), and 
2124 (Net Transactions with Customers), since CABs' business model does 
not raise the same concerns that Rules 2121, 2122 and 2124 are intended 
to address.
    Rule 2121 provides that, for securities in both listed and unlisted 
securities, a member that buys for its own account from its customer, 
or sells for its own account to its customer, shall buy or sell at a 
price which is fair, taking into consideration all relevant 
circumstances, including market conditions with respect to the security 
at the time of the transaction, the expense involved, and the fact that 
the member is entitled to a profit. Further, if the member acts as 
agent for its customer in any such transaction, the 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 the security at the time of the transaction, 
the expense of executing the order and the value of any service the 
member may have rendered by reason of its experience in and knowledge 
of such security and the market therefor.
    CABs would not be permitted to act as a principal in a securities 
transaction. Accordingly, the provisions of Rule 2121 that govern 
principal transactions would not apply to a CAB's permitted activities.
    CABs would be permitted act as agent in a securities transaction 
only in very narrow circumstances. CABs would be allowed to act as an 
agent with respect to institutional investors in connection with 
purchases or sales of unregistered securities. CABs also would be 
permitted to effect securities transactions solely in connection with 
the transfer of ownership and control of a privately-held company to a 
buyer that will actively operate the company or the business conducted 
with the assets of the company in accordance with the terms and 
conditions of an SEC rule, release, interpretation or ``no-action'' 
letter.
    In both instances, FINRA believes that these circumstances either 
involve institutional parties that negotiate the terms of permitted 
securities transactions without the need for the conditions set forth 
in Rule 2121, or involve the sale of a business as a going concern, 
which differs in nature from the types of transactions that typically 
raise issues under Rule 2121.
    Rule 2122 provides that charges, if any, for services performed, 
including, but not limited to, miscellaneous services such as 
collections due for principal, dividends, or interest; exchange or 
transfer of securities; appraisals, safekeeping or custody of 
securities, and other services shall be reasonable and not unfairly 
discriminatory among customers. As discussed above, CABs typically 
provide services to institutional customers that generally do not need 
the protections that Rule 2122 offers, since these customers are 
capable of negotiating fair prices for the services that CABs provide. 
Moreover, CABs are not permitted to provide many of the services listed 
in Rule 2122, such as collecting principal, dividends or interest, or 
providing safekeeping or custody services.

[[Page 15591]]

    Rule 2124 sets forth specific requirements for executing 
transactions with customers on a ``net'' basis. ``Net'' transactions 
are defined as a type of principal transaction, and CABs may not trade 
securities on a principal basis. For these reasons, FINRA does not 
believe it is necessary to include FINRA Rules 2121, 2122 and 2124 as 
part of the CAB rule set.
    CAB Rule 201 would subject CABs to FINRA Rule 2010 (Standards of 
Commercial Honor and Principles of Trade), which requires a member, in 
the conduct of its business, to observe high standards of commercial 
honor and just and equitable principles of trade. Depending on the 
facts, other rules, such as Rule 2010, may apply in situations in which 
a CAB charged a commission or fee that clearly is unreasonable under 
the circumstances.

D. Supervision and Responsibilities Related to Associated Persons (CAB 
Rule 300 Series)

    The proposed CAB Rule 300 Series would establish a limited set of 
supervisory rules for CABs. CABs would be subject to FINRA Rules 3220 
(Influencing or Rewarding Employees of Others), 3240 (Borrowing from or 
Lending to Customers), and 3270 (Outside Business Activities of 
Registered Persons).
    Proposed CAB Rule 311 would subject CABs to some, but not all, of 
the requirements of FINRA Rule 3110 (Supervision) and, consistent with 
Rule 3110, is designed to provide CABs with the flexibility to tailor 
their supervisory systems to their business models. CABs would be 
subject to many of the provisions of Rule 3110 concerning the 
supervision of offices, personnel, customer complaints, correspondence 
and internal communications. However, CABs would not be subject to the 
provisions of Rule 3110 that require annual compliance meetings 
(paragraph (a)(7)), review and investigation of transactions 
(paragraphs (b)(2) and (d)), specific documentation and supervisory 
procedures for supervisory personnel (paragraph (b)(6)), and internal 
inspections (paragraph (c)).
    FINRA does not believe that the annual compliance meeting 
requirement in FINRA Rule 3110(a)(7) should apply to CABs given the 
nature of CABs' business model and structure. FINRA has observed that 
most current FINRA member firms that would qualify as CABs tend to be 
small and often operate out of a single office. In addition, the range 
of rules that CABs would be subject to is narrower than the rules that 
apply to other broker-dealers. Moreover, as noted above, CABs would be 
subject to both the Regulatory and Firm Element continuing education 
requirements. Accordingly, FINRA does not believe that CABs need to 
conduct an annual compliance meeting as required under FINRA Rule 
3110(a)(7).\14\ The fact that the annual compliance meeting requirement 
would not apply to CABs or their associated persons in no way would 
reduce their responsibility to have knowledge of and comply with 
applicable securities laws and regulations and the CAB rule set.
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    \14\ For the same reasons, FINRA does not believe that FINRA 
Rule 3110.04 should apply to CABs.
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    FINRA does not believe that FINRA Rule 3110(b)(2), which requires 
members to adopt and implement procedures for the review by a 
registered principal of all transactions relating to the member's 
investment banking or securities business, or FINRA Rule 3110(d), which 
imposes requirements related to the investigation of securities 
transactions and heightened reporting requirements for members engaged 
in investment banking services, should apply to CABs. CABs would not be 
permitted to carry or act as an introducing broker with respect to 
customer accounts, hold or handle customers' funds or securities, 
accept orders from customers to purchase or sell securities except 
under the narrow circumstances discussed above, have investment 
discretion on behalf of any customer, engage in proprietary trading or 
market-making activities, or participate in Crowdfunding or Regulation 
A securities offerings. Accordingly, due to these restrictions, FINRA 
does not believe a CAB's business model necessitates the application of 
these provisions, which primarily address trading and investment 
banking functions that are beyond the permissible scope of a CAB's 
activities.\15\
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    \15\ For the same reasons, FINRA does not believe that FINRA 
Rule 3110.05 should apply to CABs.
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    FINRA does not believe that the requirements of FINRA Rule 
3110(b)(6) should apply to CABs. Paragraph (b)(6) generally requires a 
member to have procedures to prohibit its supervisory personnel from 
(1) supervising their own activities; and (2) reporting to, or having 
their compensation or continued employment determined by, a person the 
supervisor is supervising.\16\ FINRA also does not believe that FINRA 
Rule 3110(c), which requires members to conduct internal inspections of 
their businesses, should apply to CABs.
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    \16\ FINRA Rule 3110(b)(6)(C)(i) and (ii). FINRA Rule 3110(b)(6) 
also requires that a member's supervisory procedures include the 
titles, registration status and locations of the required 
supervisory personnel and the responsibilities of each supervisory 
person as these relate to the types of business engaged in, 
applicable securities laws and regulations, and FINRA rules, as well 
as a record of the names of its designated supervisory personnel and 
the dates for which such designation is or was effective. FINRA Rule 
3110(b)(6)(A) and (B). In addition, paragraph (b)(6) requires a 
member to have procedures reasonably designed to prevent the 
standards of supervision required pursuant to FINRA Rule 3110(a) 
from being compromised due to the conflicts of interest that may be 
present with respect to an associated person being supervised. FINRA 
Rule 3110(b)(6)(D).
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    FINRA believes that a CAB's business model, which is geared toward 
acting as a consultant in capital acquisition transactions, or acting 
as an agent solely in connection with purchases or sales of 
unregistered securities to institutional investors, or with the 
transfer of ownership and control of a privately-held company, does not 
give rise to the same conflicts of interest and supervisory concerns 
that paragraph (b)(6) is intended to address. As discussed above, many 
CABs operate out of a single office with a small staff, which reduces 
the need for internal inspections of numerous or remote offices. In 
addition, part of the purpose of creating a separate CAB rule set is to 
streamline and reduce existing FINRA rule requirements where it does 
not hinder investor protection. FINRA believes that the remaining 
provisions of FINRA Rule 3110, coupled with the CAB Rule 200 Series 
addressing duties and conflicts, will sufficiently protect CABs' 
customers from potential harm due to insufficient supervision.\17\
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    \17\ For the same reasons, FINRA does not believe that FINRA 
Rules 3110.10, .12, .13, or .14 should apply to CABs. FINRA also 
believes that it is unnecessary to apply FINRA Rule 3110.15 to CABs, 
since the temporary program authorized by the rule expired on 
December 1, 2015.
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    Proposed CAB Rule 313 would require CABs to designate and identify 
one or more principals to serve as a firm's chief compliance officer, 
similar to the requirements of FINRA Rule 3130(a). CAB Rule 313 would 
not require a CAB to have its chief executive officer (``CEO'') certify 
that the member has in place processes to establish, maintain, review, 
test and modify written compliance policies and written supervisory 
procedures reasonably designed to achieve compliance with applicable 
federal securities laws and regulations, and FINRA and MSRB rules, 
which are required under FINRA Rules 3130(b) and (c). FINRA does not 
believe the CEO certification is necessary given a CAB's narrow 
business model and smaller rule set.
    Proposed Rule 328 would prohibit any person associated with a CAB 
from participating in any manner in a private securities transaction as 
defined in

[[Page 15592]]

FINRA Rule 3280(e).\18\ FINRA does not believe that an associated 
person of a CAB should be engaged in selling securities away from the 
CAB, nor should a CAB have to oversee and review such transactions, 
given its limited business model. This restriction would not prohibit 
associated persons from investing in securities on their own behalf, or 
engaging in securities transactions with immediate family members, 
provided that the associated person does not receive selling 
compensation.
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    \18\ FINRA Rule 3280(e) defines ``private securities 
transaction'' as ``any securities transaction outside the regular 
course or scope of an associated person's employment with a member, 
including, though not limited to, new offerings of securities which 
are not registered with the Commission, provided however that 
transactions subject to the notification requirements of NASD Rule 
3050, transactions among immediate family members (as defined in 
FINRA Rule 5130), for which no associated person receives any 
selling compensation, and personal transactions in investment 
company and variable annuity securities, shall be excluded.''
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    Proposed CAB Rule 331 would require each CAB to implement a written 
anti-money laundering (``AML'') program. This is consistent with the 
SEC's requirements and Chapter X of Title 31 of the Code of Federal 
Regulations. Accordingly, the proposed rule is similar to FINRA Rule 
3310 (Anti-Money Laundering Compliance Program); however, the proposed 
rule contemplates that all CABs would be eligible to conduct the 
required independent testing for compliance every two years.

E. Financial and Operational Rules (CAB Rule 400 Series)

    The proposed CAB Rule 400 Series would establish a streamlined set 
of rules concerning firms' financial and operational obligations. CABs 
would be subject to FINRA Rules 4140 (Audit), 4150 (Guarantees by, or 
Flow through Benefits for, Members), 4160 (Verification of Assets), 
4511 (Books and Records--General Requirements), 4513 (Records of 
Written Customer Complaints), 4517 (Member Filing and Contact 
Information Requirements), 4524 (Supplemental FOCUS Information), 4530 
(Reporting Requirements), and 4570 (Custodian of Books and Records).
    Proposed CAB Rule 411 includes some, but not all, of the capital 
compliance requirements of FINRA Rule 4110. CABs would be required to 
suspend business operations during any period a firm is not in 
compliance with the applicable net capital requirements set forth in 
Exchange Act Rule 15c3-1, and the rule also would authorize FINRA to 
direct a CAB to suspend its operation under those circumstances. 
Proposed CAB Rule 411 also sets forth requirements concerning 
withdrawal of capital, subordinated loans, notes collateralized by 
securities, and capital borrowings.
    CABs would not be subject to FINRA Rules 4370 (Business Continuity 
Plans and Emergency Contact Information) or 4380 (Mandatory 
Participation in FINRA BC/DR Testing Under Regulation SCI). FINRA does 
not believe it would be necessary for a CAB to maintain a business 
continuity plan (BCP), given a CAB's limited activities, particularly 
since a CAB would not engage in retail customer account transactions or 
clearance, settlement, trading, underwriting or similar investment 
banking activities. Moreover, FINRA Rule 4380 relates to Rule SCI under 
the Exchange Act, which is not applicable to a member that limits its 
activities to those permitted under the CAB rule set.
    Because CABs would not carry or act as an introducing broker with 
respect to customer accounts, they would have more limited customer 
information requirements than is imposed under FINRA Rule 4512.\19\ 
CABs would have to maintain each customer's name and residence, whether 
the customer is of legal age (if applicable), and the names of any 
persons authorized to transact business on behalf of the customer. CABs 
would still have to make and preserve all books and records required 
under Exchange Act Rules 17a-3 and 17a-4.
---------------------------------------------------------------------------

    \19\ See proposed CAB Rule 451(b).
---------------------------------------------------------------------------

    CAB Rule 452(a) establishes a limited set of requirements for the 
supervision and review of a firm's general ledger accounts.

F. Securities Offerings (CAB Rule 500 Series)

    The proposed CAB Rule 500 Series would subject CABs to certain 
rules concerning securities offerings. CABs would be subject to FINRA 
Rules 5122 (Private Placements of Securities Issued by Members) and 
5150 (Fairness Opinions).

G. Investigations and Sanctions, Code of Procedure, and Arbitration and 
Mediation (CAB Rules 800, 900 and 1000)

    CABs would be subject to the FINRA Rule 8000 Series governing 
investigations and sanctions of firms, other than FINRA Rules 8110 
(Availability of Manual to Customers), 8211 (Automated Submission of 
Trading Data Requested by FINRA), and 8213 (Automated Submission of 
Trading Data for Non-Exchange-Listed Securities Requested by FINRA).
    CABs would not be subject to FINRA Rule 8110 (Availability of 
Manual to Customers), which requires members to make available a 
current copy of the FINRA manual for examination by customers upon 
request. If the Commission approves this proposed rule change, the CAB 
rule set would be available through the FINRA Web site. Accordingly, 
FINRA does not believe this rule is necessary for CABs.
    CABs also would not be subject to FINRA Rules 8211 (Automated 
Submission of Trading Data Requested by FINRA) or 8213 (Automated 
Submission of Trading Data for Non-Exchange-Listed Securities Requested 
by FINRA). Given that these rules are intended to assist FINRA in 
requesting trade data from firms engaged in securities trading, and 
that CABs would not engage in securities trading, FINRA does not 
believe that these rules should apply to CABs.
    CABs would be subject to the FINRA Rule 9000 Series governing 
disciplinary and other proceedings involving firms, other than the 
FINRA Rule 9700 Series (Procedures on Grievances Concerning the 
Automated Systems). Proposed CAB Rule 900(c) would provide that any CAB 
may be subject to a fine under FINRA Rule 9216(b) with respect to an 
enumerated list of FINRA By-Laws, CAB rules and SEC rules under the 
Exchange Act. Proposed CAB Rule 900(d) would authorize FINRA staff to 
require a CAB to file communications with the FINRA Advertising 
Regulation Department at least ten days prior to use if the staff 
determined that the CAB had departed from CAB Rule 221's standards.
    CABs would be subject to the FINRA Rule 12000 Series (Code of 
Arbitration Procedure for Customer Disputes), 13000 Series (Code of 
Arbitration Procedure for Industry Disputes) and 14000 Series (Code of 
Mediation Procedure).

III. Summary of Comments

    Commenters generally supported FINRA's proposal to develop a new 
rule set for CABs. As discussed below, some commenters recommended that 
the proposal include additional requirements or explanations in certain 
aspects.

A. Review of Membership Application

    One commenter suggested that FINRA should approve the membership 
applications of new CABs within 60 days of the filing of the 
application, provided that certain conditions are met, including: A 
completed application; the required supervisory

[[Page 15593]]

principals, who have each taken and passed the applicable examinations; 
and no significant disciplinary history or other red flag indications 
of potential compliance problems.\20\
---------------------------------------------------------------------------

    \20\ See New York State Bar Association Letter. NASD Rule 1014 
permits up to a 180 day review period absent an extension.
---------------------------------------------------------------------------

B. Registration and Licensing

    Two commenters requested that FINRA confirm that CABs may hold all 
licenses previously sought and attained by their associated persons, 
including Series 53, 4 and other licenses.\21\ One of these commenters 
also suggested that CABs should not be subject to FINRA Rule 1230(b)(6) 
\22\ regarding Operations Professional registration because of the 
scope and nature of the examination.\23\ The other commenter suggested 
that FINRA should exempt CAB Chief Compliance Officers (``CCOs'') from 
the proposed requirement to obtain and maintain the Series 14 CCO 
license because of the broad and comprehensive scope of the proposed 
license.\24\ This commenter also sought clarification as to whether a 
CAB's responsibility under Rule 209 \25\ is limited to learning the 
essential facts of the agent.\26\
---------------------------------------------------------------------------

    \21\ See 3PM and M&R Letters.
    \22\ Rule 1230 requires that each of the following persons be 
registered with FINRA as an Operations Professional: (i) Senior 
management with direct responsibility over the covered functions 
under the Rule; (ii) any person designated by senior management 
under the Rule as a supervisor, manager or other person responsible 
for approving or authorizing work, including work of other persons, 
in direct furtherance of each of the covered functions in the Rule, 
as applicable, provided that there is sufficient designation of such 
persons by senior management to address each of the applicable 
covered functions; and (iii) persons with the authority or 
discretion materially to commit a member's capital in direct 
furtherance of the covered functions in the Rule or to commit a 
member to any material contract or agreement (written or oral) in 
direct furtherance of the covered functions in the Rule.
    \23\ See 3PM Letter.
    \24\ See M&R Letter.
    \25\ Proposed Rule 209 states that every capital acquisition 
broker shall use reasonable diligence to know (and retain) the 
essential facts concerning every customer and concerning the 
authority of each person acting on behalf of such customer. For 
purposes of this Rule, facts ``essential'' to ``knowing the 
customer'' are those required to (a) effectively service the 
customer, (b) understand the authority of each person acting on 
behalf of the customer, and (c) comply with applicable laws, 
regulations and rules.
    \26\ See M&R Letter.
---------------------------------------------------------------------------

C. Registered Representative Exams

    One commenter suggested that FINRA (outside of the rulemaking 
context) establish new examinations specifically for the registered 
representatives and supervisory principals of CABs that will test only 
that subject matter relevant to the business of CABs.\27\
---------------------------------------------------------------------------

    \27\ See New York State Bar Association Letter.
---------------------------------------------------------------------------

D. Prohibition on Private Securities Transactions

    One commenter suggested that proposed Rule 328 (Prohibition on 
Private Securities Transactions) \28\ should be revised to exclude: (1) 
The investment advisory activities of associated persons who are also 
employees or supervised persons of an investment adviser registered 
with the SEC or a state, and (2) employees of a bank or trust company 
engaged in securities or advisory activities that a bank may engage in 
pursuant to the exceptions from the definition of broker or dealer in 
Exchange Act Sections 3(a)(4) or (5) of Regulation R.\29\
---------------------------------------------------------------------------

    \28\ Proposed Rule 328 would prohibit persons associated with a 
CAB from participating in any manner in a private securities 
transaction as defined in FINRA Rule 3280(e).
    \29\ See New York State Bar Association Letter.
---------------------------------------------------------------------------

    Another commenter believes that FINRA's proposed CAB rule set 
unduly prohibits sales of private placements to accredited investors 
and therefore vitiates any usefulness or appeal of the CAB rules to 
certain firms.\30\
---------------------------------------------------------------------------

    \30\ See Mehle Letter.
---------------------------------------------------------------------------

E. Secondary Transactions

    As discussed above, the definition of CAB in proposed Rule 016(c) 
includes, among the permissible activities of a CAB, ``qualifying, 
identifying, soliciting, or acting as a placement agent or finder with 
respect to institutional investors in connection with purchases or 
sales of unregistered securities.'' One commenter interpreted that 
description as including both primary issuances and secondary 
transaction in unregistered securities and requested that FINRA confirm 
the intent to include secondary transactions among the permitted 
activities of a CAB.\31\
---------------------------------------------------------------------------

    \31\ See New York State Bar Association Letter.
---------------------------------------------------------------------------

F. Grace Period for Reverses CAB Registration

    One commenter states although a CAB firm has a year to decide if it 
wants to become a registered broker-dealer, it is not convinced that 
this one-year grace period is a sufficient amount of time for a firm to 
determine if CAB status is appropriate for its business model.\32\ The 
commenter states that a converted firm may not have sufficient data 
within the first year to evaluate its decision fully and recommends 
that this grace period be extended to at least 24 months or that there 
be no grace time restrictions at all.\33\ This commenter suggested that 
FINRA allow interim continued operations as a CAB (provided the firm is 
in regulatory compliance) while an active CMA is being reviewed by 
FINRA, with the firm remaining subject to all the CAB strictures 
pending a final decision by FINRA on the CMA.\34\
---------------------------------------------------------------------------

    \32\ Id.
    \33\ Id.
    \34\ Id.
---------------------------------------------------------------------------

G. Impermissible Activities

    One commenter recommended that FINRA consider a grace period for 
firms that unintentionally conduct activities beyond the scope of a 
CAB's permissible activities.\35\
---------------------------------------------------------------------------

    \35\ See 3PM Letter.
---------------------------------------------------------------------------

H. CAB Rule Suggested Changes

    Several commenters suggested various changes to FINRA's proposed 
CAB rules. The significant suggested changes are described below.
1. Institutional Investor Definition
    One comment suggested that FINRA consider lowering the threshold 
for institutional investor preferably to $5 million or even less.\36\ 
This commenter also suggested that many broker-dealers would otherwise 
qualify as a CAB except that sometimes investors investing in clients' 
offerings may have less than $50 million in assets but are otherwise 
sophisticated, knowledgeable and advised by competent attorneys.\37\
---------------------------------------------------------------------------

    \36\ See Intellivest Letter.
    \37\ Id.
---------------------------------------------------------------------------

    In addition to institutional investors, one commenter suggested 
that FINRA permit CAB transactions with certain other categories of 
persons, specifically: (1) A ``knowledgeable employee'' as defined in 
Investment Company Act Rule 3C-5, except that for purposes of the 
institutional investor definition, ``covered company'' would mean 
either the CAB or the issuer of the securities sold in the transaction; 
and (2) a person designated by the issuer of the securities sold in the 
transaction, provided that the CAB did not solicit the person or make a 
recommendation to the person with respect to purchase of the 
securities.\38\
---------------------------------------------------------------------------

    \38\ New York State Bar Association Letter. See also Coronado 
Letter (requesting a de minimis and/or knowledgeable employee 
exemption to allow for one-off capital-raises (under various 
scenarios where accredited individuals working at alternative 
investment firms and the funds they manage or other closely 
affiliated individuals desire to invest) without violating the 
proposed CAB rules).
---------------------------------------------------------------------------

    This commenter also stated that there may be circumstances where 
the issuer wishes to sell securities to persons who would not otherwise 
qualify as institutional investors, but wants the transaction to be 
effected by the CAB.\39\ In addition, the commenter believes that CAB 
rules should not prohibit sales to those categories of persons, since 
the

[[Page 15594]]

usual concerns about suitability determinations and content of 
communications by member firms to retail investors would not apply.\40\
---------------------------------------------------------------------------

    \39\ New York State Bar Association Letter.
    \40\ Id.
---------------------------------------------------------------------------

2. Know Your Customer
    One commenter requested clarification of FINRA's statement that 
``[i]t also recognizes that a CAB or its associated person may look to 
an institutional investor's agent if the investor is represented by an 
agent.'' \41\ Specifically, clarification as to what ``look to'' 
requires and whether this can be interpreted to mean that a CAB's 
responsibility under Rule 209 is limited to learning the essential 
facts of the agent.\42\
---------------------------------------------------------------------------

    \41\ See 3PM Letter.
    \42\ Id.
---------------------------------------------------------------------------

3. Suitability
    One commenter generally agreed with Rule 211 (Suitability), but 
believes that the rule as proposed fails by requiring the suitability 
analyses to be performed before any recommendation is made.\43\ The 
commenter believes that the rule does not recognize that the process of 
diligence is ongoing, in many cases can take several months to several 
years before an investment decision is made, and often does not, and 
should not conclude until the deal is closed. The commenter also 
believes that Rule 211 should emphasize this point and encourage 
registered representatives to periodically review their suitability 
analysis throughout the offering process, but no less frequently than 
once before the subscription agreement or relevant contract is signed 
and due diligence is as complete as it can be at that particular 
time.\44\
---------------------------------------------------------------------------

    \43\ Id. Rule 211 states that a capital acquisition broker or an 
associated person of a capital acquisition broker must have a 
reasonable basis to believe that a recommended transaction or 
investment strategy (as defined in FINRA Rule 2111) involving a 
security or securities is suitable for the customer, based on the 
information obtained through the reasonable diligence of the broker 
or associated person to ascertain the customer's investment profile.
    \44\ 3PM Letter.
---------------------------------------------------------------------------

    One commenter stated that CABs are not making recommendations in 
the traditional definition of the term, and therefore, as an example, 
will not have insight into the overall composition of the institutional 
investor's portfolio--as a retail broker would have over one of their 
accounts.\45\ Accordingly, this commenter suggested that the rules 
should address some type of minimum compliance that would be 
appropriate in these situations. Further, the commenter suggested that 
a demonstrable best efforts basis may be a satisfactory alternative in 
such instances.\46\
---------------------------------------------------------------------------

    \45\ Id.
    \46\ Id.
---------------------------------------------------------------------------

4. Commissions/Fees
    One commenter stated that applying Rule 2010 (Standards of 
Commercial Honor and Principles of Trade) in situations in which a CAB 
charged a commission or fee that clearly is unreasonable under the 
circumstances may create an interpretive issue between the two sets of 
rules.\47\
---------------------------------------------------------------------------

    \47\ IMS Letter.
---------------------------------------------------------------------------

5. Supervisory Procedures
    One commenter stated that requirements related to supervisory 
procedures for supervisors should not be required for CABs.\48\ This 
commenter also recommended that FINRA clarify its expectations with 
respect to email review.\49\ Specifically, the commenter suggested that 
the rules should note that expectations for email review should be 
tailored according to the CAB's business and that such expectations 
would not be as stringent as those for broker-dealers engaged in non-
CAB activities.\50\
---------------------------------------------------------------------------

    \48\ Foreside Letter.
    \49\ Id.
    \50\ Id.
---------------------------------------------------------------------------

6. Cybersecurity
    One commenter recommended that FINRA clarify the expectations with 
respect to cybersecurity.\51\ Specifically, while the proposal suggests 
that a CAB not be required to have a business continuity plan, the 
commenter suggested that the final rules include a requirement to have 
appropriate cybersecurity/information security programs in place, 
tailored to the CAB's business.\52\
---------------------------------------------------------------------------

    \51\ Id.
    \52\ Id.
---------------------------------------------------------------------------

I. Rules Beyond FINRA's CAB Rules

1. SIPC
    One commenter stated that the CAB designation should be added to 
the list of exempt entities contained in the SIPC rules (although the 
commenter understands that FINRA is not in a position to alter the 
current SIPC requirement).\53\
---------------------------------------------------------------------------

    \53\ Q Advisors Letter.
---------------------------------------------------------------------------

2. Net Capital
    One commenter expressed concern that FINRA will force existing 
FINRA members and new applicants who now or will operate as so-called 
``nickel BDs'' to become CABs, if for no other reason than to vindicate 
FINRA's questionable statistics of eligible firms.\54\ This commenter 
also disagreed with the fact that although CABs may nominally advise an 
issuer of private funds on its capital raising efforts, FINRA's 
customer limitations for CABs only allow them to contact institutional 
investors.
---------------------------------------------------------------------------

    \54\ IMS Letter.
---------------------------------------------------------------------------

    One commenter objected to what it believes is FINRA's failure to 
change or in any way modify the net capital, recordkeeping and 
reporting requirements applicable to CABs.\55\ This commenter stated 
that compliance with the Financial Responsibility and Net Capital rules 
remains the same for both CABs and FINRA-registered BDs, and that there 
is no relief from the annual audit requirement, which, in light of 
auditors having to comply with onerous PCAOB and SEC rules, has become 
a significant expense to all FINRA member firms regardless of size.\56\
---------------------------------------------------------------------------

    \55\ Id.
    \56\ Id.
---------------------------------------------------------------------------

    Similarly, one commenter stated that the FINRA proposal should 
address the capital requirements, which appear to be unnecessary based 
on the business model of CABs and also address the requirement for a 
PCAOB audit in light of the streamlined rule set seems wholly out of 
line, excessive and meaningless to investor protections.\57\
---------------------------------------------------------------------------

    \57\ See M&R Letter.
---------------------------------------------------------------------------

    One commenter suggested that proposed CAB Rule 411 \58\ should 
remove the minimum net capital requirement of $5,000 currently applied 
to CAB members.\59\ While the commenter understood that this is outside 
of FINRA's authority, the commenter urged the SEC to review the 
calculation of net capital for CABs and modify the rule so that the 
nature of a CAB's business does not cause it to have to improperly 
report its financial condition to FINRA.\60\
---------------------------------------------------------------------------

    \58\ Rule 411 states that unless otherwise permitted by FINRA, a 
capital acquisition broker must suspend all business operations 
during any period in which it is not in compliance with applicable 
net capital requirements set forth in Exchange Act Rule 15c3-1.
    \59\ See 3PM Letter.
    \60\ Id.
---------------------------------------------------------------------------

3. Audit
    One commenter believed FINRA should eliminate the audit requirement 
altogether for broker-dealers that never hold securities or cash 
belonging to others.\61\ Another commenter also suggested that FINRA 
has not made any effort to have the SEC change Rule 17a-5 to exclude 
CABs from the annual audit requirement, or to require a review instead 
of an audit.\62\
---------------------------------------------------------------------------

    \61\ See IMS Letter.
    \62\ See Mehle Letter.
---------------------------------------------------------------------------

    Another commenter suggested that annual compliance meetings and 
annual

[[Page 15595]]

inspections should not be required for CABs.\63\
---------------------------------------------------------------------------

    \63\ See Foreside Letter.
---------------------------------------------------------------------------

4. Anti-Money Laundering
    One commenter requests that the SEC work with the appropriate 
authorities to revisit the AML responsibilities of CABs and consider 
requiring U.S. registered entities, such as registered investment 
advisers, to share certain data with FINRA member firms so that all 
registered participants may satisfy their respective compliance 
obligations in the most complete and accurate manner possible.\64\ In 
addition, this commenter sought the SEC's confirmation that the terms 
and conditions of the no[hyphen]action letters initially dated 2004 and 
extended by subsequent no[hyphen]action letter in January 2015 apply to 
CABs to the extent that customer identification is reasonable performed 
by a federally regulated entity under a contractual obligation.\65\
---------------------------------------------------------------------------

    \64\ See 3PM Letter.
    \65\ Id.
---------------------------------------------------------------------------

5. Form Custody
    One commenter urged FINRA to make efforts to have the SEC eliminate 
the quarterly ``Form Custody'' FOCUS report for CABs.\66\
---------------------------------------------------------------------------

    \66\ Mehle Letter.
---------------------------------------------------------------------------

J. State Regulation

    One commenter suggested that the Commission, FINRA, and NASAA 
should cooperate to more fully analyze the interaction between the CAB 
proposal and state registration requirements to better harmonize the 
application of these provisions.\67\ This commenter suggested that the 
most relevant provisions to it are the proposal's inclusion of firms 
that effect securities transactions solely in connection with the 
transfer of ownership and control of a privately-held company through 
the purchase, sale, exchange, issuance, repurchase, or redemption of, 
or a business combination involving, securities or assets of the 
company, to a buyer that will actively operate the company or the 
business conducted with the assets of the company, in accordance with 
the terms and conditions of an SEC rule, release, interpretation or 
``no-action'' letter that permits a person to engage in such activities 
without having to register as a broker or dealer pursuant to Section 
15(b) of the Exchange Act.\68\
---------------------------------------------------------------------------

    \67\ NASAA Letter.
    \68\ Id.
---------------------------------------------------------------------------

    The commenter indicated that it would welcome the opportunity to 
work with FINRA and the Commission on the issues presented by the 
proposal, and encouraged the Commission to delay approval of the 
proposal until there has been an opportunity to more fully explore 
these issues.\69\
---------------------------------------------------------------------------

    \69\ Id.
---------------------------------------------------------------------------

IV. Proceedings to Determine Whether to Approve or Disapprove SR-FINRA-
2015-054 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Exchange Act 
Section 19(b)(2)(B) to determine whether the proposed rule change 
should be approved or disapproved.\70\ Institution of 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 issues presented by the 
proposed rule change and provide the Commission with arguments to 
support the Commission's analysis as to whether to approve or 
disapprove the proposal.
---------------------------------------------------------------------------

    \70\ 15 U.S.C. 78s(b)(2). Exchange Act Section 19(b)(2)(B) 
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.
---------------------------------------------------------------------------

    Pursuant to Exchange Act Section 19(b)(2)(B),\71\ the Commission is 
providing notice of the grounds for disapproval under consideration. In 
particular, Exchange Act Section 15A(b)(6) \72\ 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, Exchange Act Section 15A(b)(9) \73\ 
requires that FINRA rules not impose any unnecessary or inappropriate 
burden on competition.
---------------------------------------------------------------------------

    \71\ 15 U.S.C. 78s(b)(2)(B).
    \72\ 15 U.S.C. 78o-3(b)(6).
    \73\ 15 U.S.C. 78o-3(b)(9).
---------------------------------------------------------------------------

    The Commission believes FINRA's proposed rule change raises 
questions as to whether it is consistent with the requirements of 
Exchange Act Sections 15A(b)(6) and 15A(b)(9).

V. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues raised by the proposed rule change. In particular, the 
Commission invites the written views of interested persons on whether 
the proposed rule change is inconsistent with Sections 15A(b)(6) and 
15A(b)(9), 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 that 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.\74\
---------------------------------------------------------------------------

    \74\ Exchange Act Section 19(b)(2), 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).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments by April 13, 2016 concerning whether the proposed rule change 
should be approved or disapproved. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
May 9, 2016. 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-2015-02 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-2015-054. 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

[[Page 15596]]

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-2015-054 and 
should be submitted on or before April 13, 2016. If comments are 
received, any rebuttal comments should be submitted by May 9, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\75\
---------------------------------------------------------------------------

    \75\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-06453 Filed 3-22-16; 8:45 am]
BILLING CODE 8011-01-P



                                                  15588                           Federal Register / Vol. 81, No. 56 / Wednesday, March 23, 2016 / Notices

                                                  principal place of business of certain                    SECURITIES AND EXCHANGE                                2015, FINRA extended the time period
                                                  parties to the Plan.                                      COMMISSION                                             for Commission action on this proposed
                                                                                                                                                                   rule change until March 22, 2016.
                                                  III. Discussion                                           [Release No. 34–77391; File No. SR–FINRA–                The Commission is publishing this
                                                                                                            2015–054]
                                                                                                                                                                   order to solicit comments on the
                                                     After careful review, the Commission
                                                                                                            Self-Regulatory Organizations;                         proposed rule change and to institute
                                                  finds that Amendment No. 3 is
                                                                                                            Financial Industry Regulatory                          proceedings pursuant to Exchange Act
                                                  appropriate in the public interest, for                                                                          Section 19(b)(2)(B) 5 to determine
                                                  the protection of investors and the                       Authority, Inc.; Order Instituting
                                                                                                            Proceedings To Determine Whether To                    whether to approve or disapprove the
                                                  maintenance of fair and orderly markets,                                                                         proposed rule change.
                                                  and to remove impediments to, and                         Approve or Disapprove Proposed Rule
                                                                                                            Change To Adopt FINRA Capital                            Institution of proceedings does not
                                                  perfect the mechanisms of, a national                                                                            indicate that the Commission has
                                                                                                            Acquisition Broker Rules
                                                  market system. By allowing a Party to                                                                            reached any conclusions with respect to
                                                  elect to release a symbol immediately                     March 17, 2016.                                        the proposed rule change, nor does it
                                                  after its discontinued use, Amendment                                                                            mean that the Commission will
                                                  No. 3 would encourage the efficient use                   I. Introduction                                        ultimately disapprove the proposed rule
                                                  of symbols to the benefit of the Parties                     On October 9, 2015, the Financial                   change. Rather, as discussed below, the
                                                  and potential issuers. Additionally, the                  Industry Regulatory Authority, Inc.                    Commission seeks additional input on
                                                  proposed symbol reuse process, which                      (‘‘FINRA’’) filed with the Securities and              the proposed rule change and issues
                                                  includes a presumptive 90-day waiting                     Exchange Commission (‘‘SEC’’ or                        presented by the proposal.
                                                  period as well as the requirement that                    ‘‘Commission’’), pursuant to Section
                                                                                                                                                                   II. Description of the Proposed Rule
                                                  a Party may not reuse (or consent to the                  19(b)(1) of the Securities Exchange Act
                                                                                                                                                                   Change 6
                                                  reuse of) a symbol to identify a new                      of 1934 (‘‘Exchange Act’’) 1 and Rule
                                                                                                            19b–4 thereunder,2 a proposed rule                        FINRA is proposing to create a
                                                  security unless such Party reasonably                                                                            separate rule set that would apply to
                                                                                                            change to adopt rules for capital
                                                  determines that such use would not                                                                               firms that meet the definition of ‘‘capital
                                                                                                            acquisition brokers (collectively, the
                                                  cause investor confusion, would help                      ‘‘CAB Rules’’). The proposed rule                      acquisition broker’’ (‘‘CAB’’) and elect to
                                                  ensure that the reuse of symbols would                    change was published for comment in                    be governed under this rule set. FINRA
                                                  not cause investor confusion. The                         the Federal Register on December 23,                   states that there are firms that are solely
                                                  Commission notes that the Parties have                    2015.3 The Commission received                         corporate financing firms that advise
                                                  also stated that the amendment provides                   seventeen comment letters on the                       companies on mergers and acquisitions,
                                                  for a fair and orderly approach that                      proposed rule change.4 On December 9,                  advise issuers on raising debt and equity
                                                  would be applied consistently by all                                                                             capital in private placements with
                                                  Parties to facilitate investor protection.                  1 15  U.S.C. 78s(b)(1).                              institutional investors, or provide
                                                  Finally, the Commission believes that                       2 17  CFR 240.19b–4.                                 advisory services on a consulting basis
                                                  the proposed technical and ministerial                       3 See Exchange Act Release No. 76675 (Dec. 23,
                                                                                                                                                                   to companies that need assistance
                                                                                                            2015), 80 FR 79969 (‘‘Notice’’).                       analyzing their strategic and financial
                                                  changes should be adopted to reflect                         4 See letters from Peter W. LaVigne, Esq., Chair,
                                                  updated Party names and addresses to                                                                             alternatives. These firms often are
                                                                                                            Securities Regulation Committee, Business Law
                                                  the Plan.                                                 Section, New York State Bar Association dated          registered as broker-dealers because of
                                                                                                            January 22, 2016 (‘‘New York State Bar Association     their activities and because they may
                                                  IV. Conclusion                                            Letter’’); Judith M. Shaw, President, North            receive transaction-based compensation
                                                                                                            American Securities Administrators Association         as part of their services.
                                                     For the reasons discussed above, the                   (‘‘NASAA’’), and Maine Securities Administrator,
                                                                                                                                                                      Nevertheless, FINRA believes that
                                                                                                            Washington, District of Columbia dated January 15,
                                                  Commission finds that Amendment No.                       2016 (‘‘NASAA Letter’’); Michael S. Quinn, Member      these firms do not engage in many of the
                                                  3 is appropriate in the public interest,                  and CCO, Q Advisors dated January 13, 2016 (‘‘Q        types of activities typically associated
                                                  for the protection of investors and the                   Advisors Letter’’); Howard Spindel, Senior             with traditional broker-dealers. For
                                                  maintenance of fair and orderly markets,                  Managing Director, and Cassondra E. Joseph,
                                                                                                            Managing Director, Integrated Management
                                                                                                                                                                   example, these firms typically do not
                                                  and to remove impediments to, and                         Solutions USA LLC dated January 13, 2016 (‘‘IMS        carry or act as an introducing broker
                                                  perfect the mechanisms of, a national                     Letter’’); Lisa Roth, President, Monahan & Roth,       with respect to customer accounts,
                                                  market system, or otherwise in                            LLC dated January 13, 2016 (‘‘Roth Letter’’); Mark     handle customer funds or securities,
                                                                                                            Fairbanks, President, Foreside Distributors dated      accept orders to purchase or sell
                                                  furtherance of the purposes of the Act.                   January 13, 2016 (‘‘Foreside Letter’’); Arne Rovell,
                                                                                                            Coronado Investments, LLC dated January 6, 2016        securities either as principal or agent for
                                                     It is therefore ordered, pursuant to
                                                                                                            (‘‘Coronado Letter’’); Daniel H. Kolber, President/    the customer, exercise investment
                                                  Section 11A of the Act, and the rules                     CEO, Intellivest Securities, Inc. dated December 30,   discretion on behalf of any customer, or
                                                  and regulations thereunder, that                          2016 (‘‘Intellivest Letter’’); Roger W. Mehle,         engage in proprietary trading of
                                                  Amendment No. 3 to the Plan (File No.                     Washington, District of Columbia dated December
                                                                                                                                                                   securities or market-making activities.
                                                  4–553) be, and it hereby is, approved.                    29, 2015 (‘‘Mehle Letter’’); Donna B. DiMaria,
                                                                                                            Chairman of the Board of Directors, and Lisa Roth,        FINRA is proposing to establish a
                                                    For the Commission, by the Division of                  Board of Directors, Third Party Marketers              separate rule set that would apply
                                                  Trading and Markets, pursuant to delegated                Association dated January 12, 2016 (‘‘3PM Letter’’)    exclusively to firms that meet the
                                                                                                            (letters supporting the 3PM letter: Sajan K. Thomas,
                                                  authority.7                                               President, and Stephen J. Myott, Chief Compliance
                                                                                                                                                                   definition of ‘‘capital acquisition
                                                  Robert W. Errett,                                         Officer, Thomas Capital Group, Inc. dated January      broker’’ and that elect to be governed
                                                                                                            13, 2016; Richard A. Murphy, North Bridge Capital      under this rule set. CABs would be
jstallworth on DSK7TPTVN1PROD with NOTICES




                                                  Deputy Secretary.                                         LLC, Boston, Massachusetts dated January 13, 2016;     subject to the FINRA By-Laws, as well
                                                  [FR Doc. 2016–06455 Filed 3–22–16; 8:45 am]               Steven Jafarzadeh, CAIA, CCO, Stonehaven, New
                                                                                                            York dated January 13, 2016; Dan Glusker, Perkins
                                                                                                                                                                   as core FINRA rules that FINRA believes
                                                  BILLING CODE 8011–01–P
                                                                                                            Fund Marketing LLC dated January 13, 2016; Ron
                                                                                                                                                                     5 15 U.S.C. 78s(b)(2)(B).
                                                                                                            Oldenkamp, President, Genesis Marketing Group
                                                                                                            dated January 13, 2016; Timothy Cahill, President,       6 The  proposed rule change, as described in this
                                                                                                            Compass Securities Corporation dated January 13,       Item II, is excerpted, in part, from the Notice, which
                                                                                                            2016; Frank P. L. Minard, Managing Partner, XT         was substantially prepared by FINRA. See supra
                                                    7 17   CFR 200.30–3(a)(29).                             Capital Partners, LLC dated January 12, 2016).         note 3.



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                                                                                Federal Register / Vol. 81, No. 56 / Wednesday, March 23, 2016 / Notices                                                        15589

                                                  should apply to all firms. The rule set                      A firm would be permitted to register               incorporates by reference FINRA Rules
                                                  would also include other FINRA rules                      as, or change its status to, a CAB only                1010 (Electronic Filing Requirements for
                                                  that are tailored to address CABs’                        if the firm solely engages in one or more              Uniform Forms), and 1122 (Filing of
                                                  business activities. A brief description                  of these activities.                                   Misleading Information as to
                                                  of the proposed rule set for CABs is                         The term ‘‘capital acquisition broker’’             Membership or Registration), and NASD
                                                  contained below.                                          would not include any broker or dealer                 Rules 1011 (Definitions), 1012 (General
                                                                                                            that:                                                  Provisions), 1013 (New Member
                                                  A. General Standards
                                                                                                              • carries or acts as an introducing broker           Application and Interview), 1014
                                                     Proposed CAB Rule 014 provides that                    with respect to customer accounts;                     (Department Decision), 1015 (Review by
                                                  all persons that have been approved for                     • holds or handles customers’ funds or               National Adjudicatory Council), 1016
                                                  membership in FINRA as a CAB and                          securities;                                            (Discretionary Review by FINRA Board),
                                                  persons associated with CABs shall be                       • accepts orders from customers to                   1017 (Application for Approval of
                                                  subject to the Capital Acquisition Broker                 purchase or sell securities either as principal
                                                                                                                                                                   Change in Ownership, Control, or
                                                  rules and the FINRA By-Laws                               or as agent for the customer (except as
                                                                                                            permitted by paragraphs (c)(1)(F) and (G) of           Business Operations), 1019 (Application
                                                  (including the schedules thereto), unless                                                                        to Commission for Review), 1090
                                                                                                            CAB Rule 016);
                                                  the context requires otherwise.                             • has investment discretion on behalf of             (Foreign Members), 1100 (Foreign
                                                  Proposed CAB Rule 015 provides that                       any customer;                                          Associates) and IM–1011–1 (Safe Harbor
                                                  FINRA Rule 0150(b) shall apply to the                       • engages in proprietary trading of                  for Business Expansions). Accordingly,
                                                  CAB rules. FINRA Rule 0150(b)                             securities or market-making activities; or             a CAB applicant would follow the same
                                                  provides that the FINRA rules do not                        • participates in or maintains an online             procedures for membership as any other
                                                  apply to transactions in, and business                    platform in connection with offerings of
                                                                                                            unregistered securities pursuant to
                                                                                                                                                                   FINRA applicant, with four
                                                  activities relating to, municipal                                                                                modifications.
                                                  securities as that term is defined in the                 Regulation Crowdfunding or Regulation A
                                                  Exchange Act.                                             under the Securities Act of 1933.8                       • First, an applicant for membership
                                                                                                              The term ‘‘institutional investor’’                  that seeks to qualify as a CAB would
                                                     CAB Rule 016 sets forth basic                          would have the same meaning as that
                                                  definitions modified as appropriate to                                                                           have to state in its application that it
                                                                                                            term has under FINRA Rule 2210                         intends to operate solely as such.
                                                  apply to CABs. The proposed                               (Communications with the Public), with
                                                  definitions of ‘‘capital acquisition                                                                               • Second, in reviewing an application
                                                                                                            one exception. The term would include
                                                  broker’’ and ‘‘institutional investor’’ are                                                                      for membership as a CAB, the FINRA
                                                                                                            any:
                                                  particularly important to the application                                                                        Member Regulation Department would
                                                  of the rule set. The term ‘‘capital                         • bank, savings and loan association,                consider, in addition to the standards
                                                  acquisition broker’’ would mean any                       insurance company or registered investment             for admission set forth in NASD Rule
                                                                                                            company;
                                                  broker that solely engages in any one or                    • governmental entity or subdivision                 1014, whether the applicant’s proposed
                                                  more of the following activities:                         thereof;                                               activities are consistent with the
                                                     • advising an issuer, including a private                • employee benefit plan, or multiple                 limitations imposed on CABs under
                                                  fund, concerning its securities offerings or              employee benefit plans offered to employees            CAB Rule 016(c).
                                                  other capital raising activities;                         of the same employer, that meet the                      • Third, proposed CAB Rule 116(b)
                                                     • advising a company regarding its                     requirements of Section 403(b) or Section 457
                                                                                                            of the Internal Revenue Code and in the                sets forth the procedures for an existing
                                                  purchase or sale of a business or assets or
                                                  regarding its corporate restructuring,                    aggregate have at least 100 participants, but          FINRA firm to change its status to a
                                                  including a going-private transaction,                    does not include any participant of such               CAB. If an existing firm is already
                                                  divestiture or merger;                                    plans;                                                 approved to engage in the activities of
                                                     • advising a company regarding its                       • qualified plan, as defined in Section              a CAB, and the firm does not intend to
                                                  selection of an investment banker;                        3(a)(12)(C) of the Exchange Act, or multiple           change its existing ownership, control
                                                     • assisting in the preparation of offering             qualified plans offered to employees of the            or business operations, it would not be
                                                  materials on behalf of an issuer;                         same employer, that in the aggregate have at
                                                                                                                                                                   required to file either a New Member
                                                     • providing fairness opinions, valuation               least 100 participants, but does not include
                                                  services, expert testimony, litigation support,           any participant of such plans;                         Application (‘‘NMA’’) or a Change in
                                                  and negotiation and structuring services;                   • other person (whether a natural person,            Membership Application (‘‘CMA’’).
                                                     • qualifying, identifying, soliciting, or              corporation, partnership, trust, family office         Instead, such a firm would be required
                                                  acting as a placement agent or finder with                or otherwise) with total assets of at least $50        to file a request to amend its
                                                  respect to institutional investors in                     million; and                                           membership agreement or obtain a
                                                  connection with purchases or sales of                       • person acting solely on behalf of any              membership agreement (if none exists
                                                  unregistered securities; and                              such institutional investor.                           currently) to provide that: (i) The firm’s
                                                     • effecting securities transactions solely in             The definition also would include any               activities will be limited to those
                                                  connection with the transfer of ownership
                                                  and control of a privately-held company
                                                                                                            person meeting the definition of                       permitted for CABs under CAB Rule
                                                  through the purchase, sale, exchange,                     ‘‘qualified purchaser’’ as that term is                016(c), and (ii) the firm agrees to comply
                                                  issuance, repurchase, or redemption of, or a              defined in Section 2(a)(51) of the                     with the CAB rules.10
                                                  business combination involving, securities or             Investment Company Act of 1940.9                         • Fourth, proposed CAB Rules 116(c)
                                                  assets of the company, to a buyer that will                                                                      and (d) set forth the procedures for an
                                                  actively operate the company or the business              B. FINRA Membership
                                                                                                                                                                   existing CAB to terminate its status as
                                                  conducted with the assets of the company, in                The proposed CAB Rule 100 Series
jstallworth on DSK7TPTVN1PROD with NOTICES




                                                  accordance with the terms and conditions of                                                                      such and continue as a FINRA firm.
                                                                                                            sets forth the requirements for firms that
                                                  an SEC rule, release, interpretation or ‘‘no-                                                                    Under Rule 116(c), such a firm would be
                                                                                                            wish to register as a CAB. The proposed
                                                  action’’ letter that permits a person to engage                                                                  required to file a CMA with the FINRA
                                                                                                            CAB Rule 100 Series generally
                                                  in such activities without having to register                                                                    Member Regulation Department, and to
                                                  as a broker or dealer pursuant to Section                   8 See                                                amend its membership agreement to
                                                                                                                     proposed CAB Rule 016(c)(2).
                                                  15(b) of the Exchange Act.7                                 9 See  proposed CAB Rule 016(i). FINRA Rule
                                                                                                            2210 does not include ‘‘qualified purchaser’’ within     10 There would not be an application fee
                                                    7 See   proposed CAB Rule 016(c)(1).                    its definition of ‘‘institutional investor.’’          associated with this request.



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                                                  15590                       Federal Register / Vol. 81, No. 56 / Wednesday, March 23, 2016 / Notices

                                                  provide that the firm agrees to comply                  FINRA Rules 2010 (Standards of                        if the member acts as agent for its
                                                  with all FINRA rules.11                                 Commercial Honor and Principles of                    customer in any such transaction, the
                                                     Under Rule 116(d), however, if during                Trade), 2020 (Use of Manipulative,                    member shall not charge its customer
                                                  the first year following an existing                    Deceptive or Other Fraudulent Devices),               more than a fair commission or service
                                                  FINRA member firm’s amendment to its                    2040 (Payments to Unregistered                        charge, taking into consideration all
                                                  membership agreement to convert a full-                 Persons),13 2070 (Transactions                        relevant circumstances, including
                                                  service broker-dealer to a CAB pursuant                 Involving FINRA Employees), 2080                      market conditions with respect to the
                                                  to Rule 116(b) a CAB seeks to terminate                 (Obtaining an Order of Expungement of                 security at the time of the transaction,
                                                  its status as such and continue as a                    Customer Dispute Information from the                 the expense of executing the order and
                                                  FINRA member firm, the CAB may                          CRD System), 2081 (Prohibited                         the value of any service the member
                                                  notify the FINRA Membership                             Conditions Relating to Expungement of                 may have rendered by reason of its
                                                  Application Program group of this                       Customer Dispute Information), 2263                   experience in and knowledge of such
                                                  change without having to file an                        (Arbitration Disclosure to Associated                 security and the market therefor.
                                                  application for approval of a material                  Persons Signing or Acknowledging                         CABs would not be permitted to act
                                                  change in business operations pursuant                  Form U4), and 2268 (Requirements                      as a principal in a securities transaction.
                                                  to NASD Rule 1017. The CAB would                        When Using Predispute Arbitration                     Accordingly, the provisions of Rule
                                                  instead file a request to amend its                     Agreements for Customer Accounts).                    2121 that govern principal transactions
                                                  membership agreement to provide that                       CAB Rules 209 and 211 would impose                 would not apply to a CAB’s permitted
                                                  the member firm agrees to comply with                   know-your-customer and suitability                    activities.
                                                  all FINRA rules, and execute an                         obligations similar to those imposed                     CABs would be permitted act as agent
                                                  amended membership agreement that                       under FINRA Rules 2090 and 2111. CAB                  in a securities transaction only in very
                                                  imposes the same limitations on the                     Rule 211(b) includes an exception to the              narrow circumstances. CABs would be
                                                  member firm’s activities that existed                   customer-specific suitability obligations             allowed to act as an agent with respect
                                                  prior to the member firm’s change of                    for institutional investors similar to the            to institutional investors in connection
                                                  status to a CAB.12                                      exception found in FINRA Rule 2111(b).                with purchases or sales of unregistered
                                                     The proposed CAB Rule 100 Series                        Proposed CAB Rule 221 is an
                                                                                                                                                                securities. CABs also would be
                                                  also would govern the registration and                  abbreviated version of FINRA Rule 2210
                                                                                                                                                                permitted to effect securities
                                                  qualification examinations of principals                (Communications with the Public),
                                                                                                                                                                transactions solely in connection with
                                                  and representatives that are associated                 essentially prohibiting false and
                                                                                                                                                                the transfer of ownership and control of
                                                  with CABs. These Rules incorporate by                   misleading statements.
                                                                                                             Under proposed CAB Rule 240, if a                  a privately-held company to a buyer that
                                                  reference NASD Rules 1021                                                                                     will actively operate the company or the
                                                  (Registration Requirements—                             CAB or associated person of a CAB had
                                                                                                          engaged in activities that would require              business conducted with the assets of
                                                  Principals), 1022 (Categories of                                                                              the company in accordance with the
                                                  Principal Registration), 1031                           the CAB to register as a broker or dealer
                                                                                                          under the Exchange Act, and that are                  terms and conditions of an SEC rule,
                                                  (Registration Requirements—                                                                                   release, interpretation or ‘‘no-action’’
                                                  Representatives), 1032 (Categories of                   inconsistent with the limitations
                                                                                                          imposed on CABs under CAB Rule                        letter.
                                                  Representative Registration), 1060                                                                               In both instances, FINRA believes that
                                                  (Persons Exempt from Registration),                     016(c), FINRA could examine for and
                                                                                                          enforce all FINRA rules against such a                these circumstances either involve
                                                  1070 (Qualification Examinations and                                                                          institutional parties that negotiate the
                                                  Waiver of Requirements), 1080                           broker or associated person, including
                                                                                                          any rule that applies to a FINRA broker-              terms of permitted securities
                                                  (Confidentiality of Examinations), IM–                                                                        transactions without the need for the
                                                  1000–2 (Status of Persons Serving in the                dealer that is not a CAB or to an
                                                                                                          associated person who is not a person                 conditions set forth in Rule 2121, or
                                                  Armed Forces of the United States), IM–                                                                       involve the sale of a business as a going
                                                  1000–3 (Failure to Register Personnel)                  associated with a CAB.
                                                                                                             FINRA has determined not to subject                concern, which differs in nature from
                                                  and FINRA Rule 1250 (Continuing                                                                               the types of transactions that typically
                                                                                                          CABs to FINRA Rules 2121 (Fair Prices
                                                  Education Requirements). Accordingly,                                                                         raise issues under Rule 2121.
                                                                                                          and Commissions), 2122 (Charges for
                                                  CAB firm principals and representatives                                                                          Rule 2122 provides that charges, if
                                                                                                          Services Performed), and 2124 (Net
                                                  would be subject to the same                                                                                  any, for services performed, including,
                                                                                                          Transactions with Customers), since
                                                  registration, qualification examination,                                                                      but not limited to, miscellaneous
                                                                                                          CABs’ business model does not raise the
                                                  and continuing education requirements                                                                         services such as collections due for
                                                                                                          same concerns that Rules 2121, 2122
                                                  as principals and representatives of                                                                          principal, dividends, or interest;
                                                                                                          and 2124 are intended to address.
                                                  other FINRA firms. CABs also would be                      Rule 2121 provides that, for securities            exchange or transfer of securities;
                                                  subject to FINRA Rule 1230(b)(6)                        in both listed and unlisted securities, a             appraisals, safekeeping or custody of
                                                  regarding Operations Professional                       member that buys for its own account                  securities, and other services shall be
                                                  registration.                                           from its customer, or sells for its own               reasonable and not unfairly
                                                  C. Duties and Conflicts (CAB Rule 200                   account to its customer, shall buy or sell            discriminatory among customers. As
                                                  Series)                                                 at a price which is fair, taking into                 discussed above, CABs typically
                                                                                                          consideration all relevant                            provide services to institutional
                                                    The proposed CAB Rule 200 Series
                                                                                                          circumstances, including market                       customers that generally do not need the
                                                  would establish a streamlined set of
                                                                                                          conditions with respect to the security               protections that Rule 2122 offers, since
                                                  conduct rules. CABs would be subject to
                                                                                                          at the time of the transaction, the                   these customers are capable of
jstallworth on DSK7TPTVN1PROD with NOTICES




                                                    11 Absent a waiver, such a firm would have to pay
                                                                                                          expense involved, and the fact that the               negotiating fair prices for the services
                                                  an application fee associated with the CMA. See         member is entitled to a profit. Further,              that CABs provide. Moreover, CABs are
                                                  FINRA By-Laws, Schedule A, Section 4(i).                                                                      not permitted to provide many of the
                                                    12 To the extent that the rules applicable to the       13 The SEC has approved FINRA’s rule change to
                                                                                                                                                                services listed in Rule 2122, such as
                                                  member firm had been amended since it had               adopt rules relating to payments to unregistered
                                                  changed its status to a CAB, FINRA would have the       persons for the consolidated FINRA rulebook. See
                                                                                                                                                                collecting principal, dividends or
                                                  discretion to modify any limitations to reflect any     Regulatory Notice 15–07 (March 2015). FINRA Rule      interest, or providing safekeeping or
                                                  new rule requirements.                                  2040 became effective on August 24, 2015.             custody services.


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                                                                              Federal Register / Vol. 81, No. 56 / Wednesday, March 23, 2016 / Notices                                                      15591

                                                     Rule 2124 sets forth specific                        to both the Regulatory and Firm                        also does not believe that FINRA Rule
                                                  requirements for executing transactions                 Element continuing education                           3110(c), which requires members to
                                                  with customers on a ‘‘net’’ basis. ‘‘Net’’              requirements. Accordingly, FINRA does                  conduct internal inspections of their
                                                  transactions are defined as a type of                   not believe that CABs need to conduct                  businesses, should apply to CABs.
                                                  principal transaction, and CABs may                     an annual compliance meeting as                           FINRA believes that a CAB’s business
                                                  not trade securities on a principal basis.              required under FINRA Rule                              model, which is geared toward acting as
                                                  For these reasons, FINRA does not                       3110(a)(7).14 The fact that the annual                 a consultant in capital acquisition
                                                  believe it is necessary to include FINRA                compliance meeting requirement would                   transactions, or acting as an agent solely
                                                  Rules 2121, 2122 and 2124 as part of the                not apply to CABs or their associated                  in connection with purchases or sales of
                                                  CAB rule set.                                           persons in no way would reduce their                   unregistered securities to institutional
                                                     CAB Rule 201 would subject CABs to                   responsibility to have knowledge of and                investors, or with the transfer of
                                                  FINRA Rule 2010 (Standards of                           comply with applicable securities laws                 ownership and control of a privately-
                                                  Commercial Honor and Principles of                      and regulations and the CAB rule set.                  held company, does not give rise to the
                                                  Trade), which requires a member, in the                    FINRA does not believe that FINRA                   same conflicts of interest and
                                                  conduct of its business, to observe high                Rule 3110(b)(2), which requires                        supervisory concerns that paragraph
                                                  standards of commercial honor and just                  members to adopt and implement                         (b)(6) is intended to address. As
                                                  and equitable principles of trade.                      procedures for the review by a                         discussed above, many CABs operate
                                                  Depending on the facts, other rules,                    registered principal of all transactions               out of a single office with a small staff,
                                                  such as Rule 2010, may apply in                         relating to the member’s investment                    which reduces the need for internal
                                                  situations in which a CAB charged a                     banking or securities business, or                     inspections of numerous or remote
                                                  commission or fee that clearly is                       FINRA Rule 3110(d), which imposes                      offices. In addition, part of the purpose
                                                  unreasonable under the circumstances.                   requirements related to the investigation              of creating a separate CAB rule set is to
                                                                                                          of securities transactions and                         streamline and reduce existing FINRA
                                                  D. Supervision and Responsibilities
                                                                                                          heightened reporting requirements for                  rule requirements where it does not
                                                  Related to Associated Persons (CAB
                                                                                                          members engaged in investment                          hinder investor protection. FINRA
                                                  Rule 300 Series)
                                                                                                          banking services, should apply to CABs.                believes that the remaining provisions
                                                     The proposed CAB Rule 300 Series                     CABs would not be permitted to carry                   of FINRA Rule 3110, coupled with the
                                                  would establish a limited set of                        or act as an introducing broker with                   CAB Rule 200 Series addressing duties
                                                  supervisory rules for CABs. CABs would                  respect to customer accounts, hold or                  and conflicts, will sufficiently protect
                                                  be subject to FINRA Rules 3220                          handle customers’ funds or securities,                 CABs’ customers from potential harm
                                                  (Influencing or Rewarding Employees of                  accept orders from customers to                        due to insufficient supervision.17
                                                  Others), 3240 (Borrowing from or                        purchase or sell securities except under
                                                  Lending to Customers), and 3270                                                                                   Proposed CAB Rule 313 would
                                                                                                          the narrow circumstances discussed                     require CABs to designate and identify
                                                  (Outside Business Activities of                         above, have investment discretion on
                                                  Registered Persons).                                                                                           one or more principals to serve as a
                                                                                                          behalf of any customer, engage in                      firm’s chief compliance officer, similar
                                                     Proposed CAB Rule 311 would                          proprietary trading or market-making
                                                  subject CABs to some, but not all, of the                                                                      to the requirements of FINRA Rule
                                                                                                          activities, or participate in                          3130(a). CAB Rule 313 would not
                                                  requirements of FINRA Rule 3110                         Crowdfunding or Regulation A
                                                  (Supervision) and, consistent with Rule                                                                        require a CAB to have its chief executive
                                                                                                          securities offerings. Accordingly, due to              officer (‘‘CEO’’) certify that the member
                                                  3110, is designed to provide CABs with                  these restrictions, FINRA does not
                                                  the flexibility to tailor their supervisory                                                                    has in place processes to establish,
                                                                                                          believe a CAB’s business model                         maintain, review, test and modify
                                                  systems to their business models. CABs                  necessitates the application of these
                                                  would be subject to many of the                                                                                written compliance policies and written
                                                                                                          provisions, which primarily address                    supervisory procedures reasonably
                                                  provisions of Rule 3110 concerning the                  trading and investment banking
                                                  supervision of offices, personnel,                                                                             designed to achieve compliance with
                                                                                                          functions that are beyond the                          applicable federal securities laws and
                                                  customer complaints, correspondence                     permissible scope of a CAB’s
                                                  and internal communications. However,                                                                          regulations, and FINRA and MSRB
                                                                                                          activities.15                                          rules, which are required under FINRA
                                                  CABs would not be subject to the                           FINRA does not believe that the
                                                  provisions of Rule 3110 that require                                                                           Rules 3130(b) and (c). FINRA does not
                                                                                                          requirements of FINRA Rule 3110(b)(6)
                                                  annual compliance meetings (paragraph                                                                          believe the CEO certification is
                                                                                                          should apply to CABs. Paragraph (b)(6)
                                                  (a)(7)), review and investigation of                                                                           necessary given a CAB’s narrow
                                                                                                          generally requires a member to have
                                                  transactions (paragraphs (b)(2) and (d)),                                                                      business model and smaller rule set.
                                                                                                          procedures to prohibit its supervisory
                                                  specific documentation and supervisory                                                                            Proposed Rule 328 would prohibit
                                                                                                          personnel from (1) supervising their
                                                  procedures for supervisory personnel                                                                           any person associated with a CAB from
                                                                                                          own activities; and (2) reporting to, or
                                                  (paragraph (b)(6)), and internal                                                                               participating in any manner in a private
                                                                                                          having their compensation or continued
                                                  inspections (paragraph (c)).                                                                                   securities transaction as defined in
                                                                                                          employment determined by, a person
                                                     FINRA does not believe that the                      the supervisor is supervising.16 FINRA
                                                  annual compliance meeting requirement                                                                          personnel and the dates for which such designation
                                                                                                                                                                 is or was effective. FINRA Rule 3110(b)(6)(A) and
                                                  in FINRA Rule 3110(a)(7) should apply                     14 For the same reasons, FINRA does not believe      (B). In addition, paragraph (b)(6) requires a member
                                                  to CABs given the nature of CABs’                       that FINRA Rule 3110.04 should apply to CABs.          to have procedures reasonably designed to prevent
                                                  business model and structure. FINRA                       15 For the same reasons, FINRA does not believe      the standards of supervision required pursuant to
                                                  has observed that most current FINRA                    that FINRA Rule 3110.05 should apply to CABs.          FINRA Rule 3110(a) from being compromised due
jstallworth on DSK7TPTVN1PROD with NOTICES




                                                                                                            16 FINRA Rule 3110(b)(6)(C)(i) and (ii). FINRA       to the conflicts of interest that may be present with
                                                  member firms that would qualify as                      Rule 3110(b)(6) also requires that a member’s          respect to an associated person being supervised.
                                                  CABs tend to be small and often operate                 supervisory procedures include the titles,             FINRA Rule 3110(b)(6)(D).
                                                  out of a single office. In addition, the                registration status and locations of the required         17 For the same reasons, FINRA does not believe

                                                  range of rules that CABs would be                       supervisory personnel and the responsibilities of      that FINRA Rules 3110.10, .12, .13, or .14 should
                                                                                                          each supervisory person as these relate to the types   apply to CABs. FINRA also believes that it is
                                                  subject to is narrower than the rules that              of business engaged in, applicable securities laws     unnecessary to apply FINRA Rule 3110.15 to CABs,
                                                  apply to other broker-dealers. Moreover,                and regulations, and FINRA rules, as well as a         since the temporary program authorized by the rule
                                                  as noted above, CABs would be subject                   record of the names of its designated supervisory      expired on December 1, 2015.



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                                                  15592                       Federal Register / Vol. 81, No. 56 / Wednesday, March 23, 2016 / Notices

                                                  FINRA Rule 3280(e).18 FINRA does not                    operation under those circumstances.                  for Non-Exchange-Listed Securities
                                                  believe that an associated person of a                  Proposed CAB Rule 411 also sets forth                 Requested by FINRA).
                                                  CAB should be engaged in selling                        requirements concerning withdrawal of                    CABs would not be subject to FINRA
                                                  securities away from the CAB, nor                       capital, subordinated loans, notes                    Rule 8110 (Availability of Manual to
                                                  should a CAB have to oversee and                        collateralized by securities, and capital             Customers), which requires members to
                                                  review such transactions, given its                     borrowings.                                           make available a current copy of the
                                                  limited business model. This restriction                  CABs would not be subject to FINRA                  FINRA manual for examination by
                                                  would not prohibit associated persons                   Rules 4370 (Business Continuity Plans                 customers upon request. If the
                                                  from investing in securities on their                   and Emergency Contact Information) or                 Commission approves this proposed
                                                  own behalf, or engaging in securities                   4380 (Mandatory Participation in                      rule change, the CAB rule set would be
                                                  transactions with immediate family                      FINRA BC/DR Testing Under Regulation                  available through the FINRA Web site.
                                                  members, provided that the associated                   SCI). FINRA does not believe it would                 Accordingly, FINRA does not believe
                                                  person does not receive selling                         be necessary for a CAB to maintain a                  this rule is necessary for CABs.
                                                  compensation.                                           business continuity plan (BCP), given a                  CABs also would not be subject to
                                                     Proposed CAB Rule 331 would                          CAB’s limited activities, particularly                FINRA Rules 8211 (Automated
                                                  require each CAB to implement a                         since a CAB would not engage in retail                Submission of Trading Data Requested
                                                  written anti-money laundering (‘‘AML’’)                 customer account transactions or                      by FINRA) or 8213 (Automated
                                                  program. This is consistent with the                    clearance, settlement, trading,                       Submission of Trading Data for Non-
                                                  SEC’s requirements and Chapter X of                     underwriting or similar investment                    Exchange-Listed Securities Requested
                                                  Title 31 of the Code of Federal                         banking activities. Moreover, FINRA                   by FINRA). Given that these rules are
                                                  Regulations. Accordingly, the proposed                  Rule 4380 relates to Rule SCI under the               intended to assist FINRA in requesting
                                                  rule is similar to FINRA Rule 3310                      Exchange Act, which is not applicable                 trade data from firms engaged in
                                                  (Anti-Money Laundering Compliance                       to a member that limits its activities to             securities trading, and that CABs would
                                                  Program); however, the proposed rule                    those permitted under the CAB rule set.               not engage in securities trading, FINRA
                                                  contemplates that all CABs would be                       Because CABs would not carry or act                 does not believe that these rules should
                                                  eligible to conduct the required                        as an introducing broker with respect to              apply to CABs.
                                                  independent testing for compliance                      customer accounts, they would have                       CABs would be subject to the FINRA
                                                  every two years.                                        more limited customer information                     Rule 9000 Series governing disciplinary
                                                                                                          requirements than is imposed under                    and other proceedings involving firms,
                                                  E. Financial and Operational Rules                                                                            other than the FINRA Rule 9700 Series
                                                  (CAB Rule 400 Series)                                   FINRA Rule 4512.19 CABs would have
                                                                                                          to maintain each customer’s name and                  (Procedures on Grievances Concerning
                                                    The proposed CAB Rule 400 Series                      residence, whether the customer is of                 the Automated Systems). Proposed CAB
                                                  would establish a streamlined set of                    legal age (if applicable), and the names              Rule 900(c) would provide that any CAB
                                                  rules concerning firms’ financial and                   of any persons authorized to transact                 may be subject to a fine under FINRA
                                                  operational obligations. CABs would be                  business on behalf of the customer.                   Rule 9216(b) with respect to an
                                                  subject to FINRA Rules 4140 (Audit),                    CABs would still have to make and                     enumerated list of FINRA By-Laws, CAB
                                                  4150 (Guarantees by, or Flow through                    preserve all books and records required               rules and SEC rules under the Exchange
                                                  Benefits for, Members), 4160                            under Exchange Act Rules 17a–3 and                    Act. Proposed CAB Rule 900(d) would
                                                  (Verification of Assets), 4511 (Books and               17a–4.                                                authorize FINRA staff to require a CAB
                                                  Records—General Requirements), 4513                                                                           to file communications with the FINRA
                                                                                                            CAB Rule 452(a) establishes a limited
                                                  (Records of Written Customer                                                                                  Advertising Regulation Department at
                                                                                                          set of requirements for the supervision
                                                  Complaints), 4517 (Member Filing and                                                                          least ten days prior to use if the staff
                                                                                                          and review of a firm’s general ledger
                                                  Contact Information Requirements),                                                                            determined that the CAB had departed
                                                                                                          accounts.
                                                  4524 (Supplemental FOCUS                                                                                      from CAB Rule 221’s standards.
                                                  Information), 4530 (Reporting                           F. Securities Offerings (CAB Rule 500                    CABs would be subject to the FINRA
                                                  Requirements), and 4570 (Custodian of                   Series)                                               Rule 12000 Series (Code of Arbitration
                                                  Books and Records).                                                                                           Procedure for Customer Disputes),
                                                                                                            The proposed CAB Rule 500 Series
                                                    Proposed CAB Rule 411 includes                                                                              13000 Series (Code of Arbitration
                                                                                                          would subject CABs to certain rules
                                                  some, but not all, of the capital                                                                             Procedure for Industry Disputes) and
                                                                                                          concerning securities offerings. CABs
                                                  compliance requirements of FINRA Rule                                                                         14000 Series (Code of Mediation
                                                                                                          would be subject to FINRA Rules 5122
                                                  4110. CABs would be required to                                                                               Procedure).
                                                                                                          (Private Placements of Securities Issued
                                                  suspend business operations during any                                                                        III. Summary of Comments
                                                                                                          by Members) and 5150 (Fairness
                                                  period a firm is not in compliance with
                                                                                                          Opinions).                                               Commenters generally supported
                                                  the applicable net capital requirements
                                                  set forth in Exchange Act Rule 15c3–1,                  G. Investigations and Sanctions, Code of              FINRA’s proposal to develop a new rule
                                                  and the rule also would authorize                       Procedure, and Arbitration and                        set for CABs. As discussed below, some
                                                  FINRA to direct a CAB to suspend its                    Mediation (CAB Rules 800, 900 and                     commenters recommended that the
                                                                                                          1000)                                                 proposal include additional
                                                     18 FINRA Rule 3280(e) defines ‘‘private securities                                                         requirements or explanations in certain
                                                  transaction’’ as ‘‘any securities transaction outside     CABs would be subject to the FINRA                  aspects.
                                                  the regular course or scope of an associated person’s   Rule 8000 Series governing
                                                  employment with a member, including, though not         investigations and sanctions of firms,                A. Review of Membership Application
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                                                  limited to, new offerings of securities which are not   other than FINRA Rules 8110
                                                  registered with the Commission, provided however
                                                                                                                                                                  One commenter suggested that FINRA
                                                  that transactions subject to the notification           (Availability of Manual to Customers),                should approve the membership
                                                  requirements of NASD Rule 3050, transactions            8211 (Automated Submission of Trading                 applications of new CABs within 60
                                                  among immediate family members (as defined in           Data Requested by FINRA), and 8213                    days of the filing of the application,
                                                  FINRA Rule 5130), for which no associated person        (Automated Submission of Trading Data
                                                  receives any selling compensation, and personal
                                                                                                                                                                provided that certain conditions are
                                                  transactions in investment company and variable                                                               met, including: A completed
                                                  annuity securities, shall be excluded.’’                  19 See   proposed CAB Rule 451(b).                  application; the required supervisory


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                                                                               Federal Register / Vol. 81, No. 56 / Wednesday, March 23, 2016 / Notices                                                      15593

                                                  principals, who have each taken and                       D. Prohibition on Private Securities                 compliance) while an active CMA is
                                                  passed the applicable examinations; and                   Transactions                                         being reviewed by FINRA, with the firm
                                                  no significant disciplinary history or                      One commenter suggested that                       remaining subject to all the CAB
                                                  other red flag indications of potential                   proposed Rule 328 (Prohibition on                    strictures pending a final decision by
                                                  compliance problems.20                                    Private Securities Transactions) 28                  FINRA on the CMA.34
                                                  B. Registration and Licensing                             should be revised to exclude: (1) The                G. Impermissible Activities
                                                                                                            investment advisory activities of
                                                     Two commenters requested that                                                                                 One commenter recommended that
                                                                                                            associated persons who are also
                                                  FINRA confirm that CABs may hold all                                                                           FINRA consider a grace period for firms
                                                                                                            employees or supervised persons of an
                                                  licenses previously sought and attained                                                                        that unintentionally conduct activities
                                                                                                            investment adviser registered with the
                                                  by their associated persons, including                                                                         beyond the scope of a CAB’s permissible
                                                                                                            SEC or a state, and (2) employees of a
                                                  Series 53, 4 and other licenses.21 One of                                                                      activities.35
                                                                                                            bank or trust company engaged in
                                                  these commenters also suggested that
                                                                                                            securities or advisory activities that a             H. CAB Rule Suggested Changes
                                                  CABs should not be subject to FINRA
                                                                                                            bank may engage in pursuant to the                     Several commenters suggested various
                                                  Rule 1230(b)(6) 22 regarding Operations
                                                                                                            exceptions from the definition of broker             changes to FINRA’s proposed CAB
                                                  Professional registration because of the
                                                                                                            or dealer in Exchange Act Sections                   rules. The significant suggested changes
                                                  scope and nature of the examination.23
                                                                                                            3(a)(4) or (5) of Regulation R.29                    are described below.
                                                  The other commenter suggested that                          Another commenter believes that
                                                  FINRA should exempt CAB Chief                             FINRA’s proposed CAB rule set unduly                 1. Institutional Investor Definition
                                                  Compliance Officers (‘‘CCOs’’) from the                   prohibits sales of private placements to
                                                  proposed requirement to obtain and                                                                                One comment suggested that FINRA
                                                                                                            accredited investors and therefore                   consider lowering the threshold for
                                                  maintain the Series 14 CCO license                        vitiates any usefulness or appeal of the
                                                  because of the broad and comprehensive                                                                         institutional investor preferably to $5
                                                                                                            CAB rules to certain firms.30                        million or even less.36 This commenter
                                                  scope of the proposed license.24 This
                                                  commenter also sought clarification as                    E. Secondary Transactions                            also suggested that many broker-dealers
                                                  to whether a CAB’s responsibility under                                                                        would otherwise qualify as a CAB
                                                                                                               As discussed above, the definition of
                                                  Rule 209 25 is limited to learning the                                                                         except that sometimes investors
                                                                                                            CAB in proposed Rule 016(c) includes,
                                                  essential facts of the agent.26                                                                                investing in clients’ offerings may have
                                                                                                            among the permissible activities of a
                                                                                                                                                                 less than $50 million in assets but are
                                                  C. Registered Representative Exams                        CAB, ‘‘qualifying, identifying, soliciting,
                                                                                                                                                                 otherwise sophisticated, knowledgeable
                                                                                                            or acting as a placement agent or finder
                                                    One commenter suggested that FINRA                                                                           and advised by competent attorneys.37
                                                                                                            with respect to institutional investors in              In addition to institutional investors,
                                                  (outside of the rulemaking context)                       connection with purchases or sales of
                                                  establish new examinations specifically                                                                        one commenter suggested that FINRA
                                                                                                            unregistered securities.’’ One
                                                  for the registered representatives and                                                                         permit CAB transactions with certain
                                                                                                            commenter interpreted that description
                                                  supervisory principals of CABs that will                                                                       other categories of persons, specifically:
                                                                                                            as including both primary issuances and
                                                  test only that subject matter relevant to                                                                      (1) A ‘‘knowledgeable employee’’ as
                                                                                                            secondary transaction in unregistered
                                                  the business of CABs.27                                                                                        defined in Investment Company Act
                                                                                                            securities and requested that FINRA
                                                                                                                                                                 Rule 3C–5, except that for purposes of
                                                                                                            confirm the intent to include secondary
                                                     20 See New York State Bar Association Letter.                                                               the institutional investor definition,
                                                  NASD Rule 1014 permits up to a 180 day review             transactions among the permitted
                                                                                                                                                                 ‘‘covered company’’ would mean either
                                                  period absent an extension.                               activities of a CAB.31
                                                     21 See 3PM and M&R Letters.
                                                                                                                                                                 the CAB or the issuer of the securities
                                                     22 Rule 1230 requires that each of the following
                                                                                                            F. Grace Period for Reverses CAB                     sold in the transaction; and (2) a person
                                                  persons be registered with FINRA as an Operations         Registration                                         designated by the issuer of the securities
                                                  Professional: (i) Senior management with direct              One commenter states although a CAB               sold in the transaction, provided that
                                                  responsibility over the covered functions under the                                                            the CAB did not solicit the person or
                                                  Rule; (ii) any person designated by senior                firm has a year to decide if it wants to
                                                  management under the Rule as a supervisor,                become a registered broker-dealer, it is             make a recommendation to the person
                                                  manager or other person responsible for approving         not convinced that this one-year grace               with respect to purchase of the
                                                  or authorizing work, including work of other              period is a sufficient amount of time for            securities.38
                                                  persons, in direct furtherance of each of the covered                                                             This commenter also stated that there
                                                  functions in the Rule, as applicable, provided that       a firm to determine if CAB status is
                                                  there is sufficient designation of such persons by        appropriate for its business model.32                may be circumstances where the issuer
                                                  senior management to address each of the                  The commenter states that a converted                wishes to sell securities to persons who
                                                  applicable covered functions; and (iii) persons with      firm may not have sufficient data within             would not otherwise qualify as
                                                  the authority or discretion materially to commit a                                                             institutional investors, but wants the
                                                  member’s capital in direct furtherance of the             the first year to evaluate its decision
                                                  covered functions in the Rule or to commit a              fully and recommends that this grace                 transaction to be effected by the CAB.39
                                                  member to any material contract or agreement              period be extended to at least 24 months             In addition, the commenter believes that
                                                  (written or oral) in direct furtherance of the covered    or that there be no grace time                       CAB rules should not prohibit sales to
                                                  functions in the Rule.                                                                                         those categories of persons, since the
                                                     23 See 3PM Letter.                                     restrictions at all.33 This commenter
                                                     24 See M&R Letter.                                     suggested that FINRA allow interim
                                                                                                                                                                   34 Id.
                                                     25 Proposed Rule 209 states that every capital         continued operations as a CAB
                                                                                                                                                                   35 See   3PM Letter.
                                                  acquisition broker shall use reasonable diligence to      (provided the firm is in regulatory                    36 See
                                                  know (and retain) the essential facts concerning                                                                          Intellivest Letter.
                                                                                                                                                                   37 Id.
                                                  every customer and concerning the authority of
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                                                                                                              28 Proposed Rule 328 would prohibit persons
                                                  each person acting on behalf of such customer. For                                                               38 New York State Bar Association Letter. See also
                                                                                                            associated with a CAB from participating in any
                                                  purposes of this Rule, facts ‘‘essential’’ to ‘‘knowing                                                        Coronado Letter (requesting a de minimis and/or
                                                  the customer’’ are those required to (a) effectively      manner in a private securities transaction as
                                                                                                                                                                 knowledgeable employee exemption to allow for
                                                  service the customer, (b) understand the authority        defined in FINRA Rule 3280(e).
                                                                                                              29 See New York State Bar Association Letter.
                                                                                                                                                                 one-off capital-raises (under various scenarios
                                                  of each person acting on behalf of the customer, and                                                           where accredited individuals working at alternative
                                                                                                              30 See Mehle Letter.
                                                  (c) comply with applicable laws, regulations and                                                               investment firms and the funds they manage or
                                                  rules.                                                      31 See New York State Bar Association Letter.
                                                                                                                                                                 other closely affiliated individuals desire to invest)
                                                     26 See M&R Letter.                                       32 Id.                                             without violating the proposed CAB rules).
                                                     27 See New York State Bar Association Letter.            33 Id.                                               39 New York State Bar Association Letter.




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                                                  15594                         Federal Register / Vol. 81, No. 56 / Wednesday, March 23, 2016 / Notices

                                                  usual concerns about suitability                          demonstrable best efforts basis may be                 commenter also disagreed with the fact
                                                  determinations and content of                             a satisfactory alternative in such                     that although CABs may nominally
                                                  communications by member firms to                         instances.46                                           advise an issuer of private funds on its
                                                  retail investors would not apply.40                                                                              capital raising efforts, FINRA’s customer
                                                                                                            4. Commissions/Fees
                                                                                                                                                                   limitations for CABs only allow them to
                                                  2. Know Your Customer                                        One commenter stated that applying                  contact institutional investors.
                                                     One commenter requested                                Rule 2010 (Standards of Commercial                       One commenter objected to what it
                                                  clarification of FINRA’s statement that                   Honor and Principles of Trade) in                      believes is FINRA’s failure to change or
                                                  ‘‘[i]t also recognizes that a CAB or its                  situations in which a CAB charged a                    in any way modify the net capital,
                                                  associated person may look to an                          commission or fee that clearly is                      recordkeeping and reporting
                                                  institutional investor’s agent if the                     unreasonable under the circumstances                   requirements applicable to CABs.55 This
                                                  investor is represented by an agent.’’ 41                 may create an interpretive issue                       commenter stated that compliance with
                                                  Specifically, clarification as to what                    between the two sets of rules.47                       the Financial Responsibility and Net
                                                  ‘‘look to’’ requires and whether this can                 5. Supervisory Procedures                              Capital rules remains the same for both
                                                  be interpreted to mean that a CAB’s                                                                              CABs and FINRA-registered BDs, and
                                                  responsibility under Rule 209 is limited                     One commenter stated that                           that there is no relief from the annual
                                                  to learning the essential facts of the                    requirements related to supervisory                    audit requirement, which, in light of
                                                  agent.42                                                  procedures for supervisors should not                  auditors having to comply with onerous
                                                                                                            be required for CABs.48 This commenter                 PCAOB and SEC rules, has become a
                                                  3. Suitability                                            also recommended that FINRA clarify                    significant expense to all FINRA
                                                     One commenter generally agreed with                    its expectations with respect to email                 member firms regardless of size.56
                                                  Rule 211 (Suitability), but believes that                 review.49 Specifically, the commenter                    Similarly, one commenter stated that
                                                  the rule as proposed fails by requiring                   suggested that the rules should note that              the FINRA proposal should address the
                                                  the suitability analyses to be performed                  expectations for email review should be                capital requirements, which appear to
                                                  before any recommendation is made.43                      tailored according to the CAB’s business               be unnecessary based on the business
                                                  The commenter believes that the rule                      and that such expectations would not be                model of CABs and also address the
                                                  does not recognize that the process of                    as stringent as those for broker-dealers               requirement for a PCAOB audit in light
                                                  diligence is ongoing, in many cases can                   engaged in non-CAB activities.50                       of the streamlined rule set seems wholly
                                                  take several months to several years                      6. Cybersecurity                                       out of line, excessive and meaningless
                                                  before an investment decision is made,                                                                           to investor protections.57
                                                  and often does not, and should not                           One commenter recommended that                        One commenter suggested that
                                                  conclude until the deal is closed. The                    FINRA clarify the expectations with                    proposed CAB Rule 411 58 should
                                                                                                            respect to cybersecurity.51 Specifically,              remove the minimum net capital
                                                  commenter also believes that Rule 211
                                                                                                            while the proposal suggests that a CAB                 requirement of $5,000 currently applied
                                                  should emphasize this point and
                                                                                                            not be required to have a business                     to CAB members.59 While the
                                                  encourage registered representatives to
                                                                                                            continuity plan, the commenter                         commenter understood that this is
                                                  periodically review their suitability
                                                                                                            suggested that the final rules include a               outside of FINRA’s authority, the
                                                  analysis throughout the offering process,
                                                                                                            requirement to have appropriate                        commenter urged the SEC to review the
                                                  but no less frequently than once before
                                                                                                            cybersecurity/information security                     calculation of net capital for CABs and
                                                  the subscription agreement or relevant
                                                                                                            programs in place, tailored to the CAB’s               modify the rule so that the nature of a
                                                  contract is signed and due diligence is
                                                                                                            business.52                                            CAB’s business does not cause it to have
                                                  as complete as it can be at that
                                                  particular time.44                                        I. Rules Beyond FINRA’s CAB Rules                      to improperly report its financial
                                                     One commenter stated that CABs are                                                                            condition to FINRA.60
                                                                                                            1. SIPC
                                                  not making recommendations in the                                                                                3. Audit
                                                  traditional definition of the term, and                      One commenter stated that the CAB
                                                  therefore, as an example, will not have                   designation should be added to the list                   One commenter believed FINRA
                                                  insight into the overall composition of                   of exempt entities contained in the SIPC               should eliminate the audit requirement
                                                  the institutional investor’s portfolio—as                 rules (although the commenter                          altogether for broker-dealers that never
                                                  a retail broker would have over one of                    understands that FINRA is not in a                     hold securities or cash belonging to
                                                  their accounts.45 Accordingly, this                       position to alter the current SIPC                     others.61 Another commenter also
                                                  commenter suggested that the rules                        requirement).53                                        suggested that FINRA has not made any
                                                  should address some type of minimum                                                                              effort to have the SEC change Rule 17a–
                                                                                                            2. Net Capital                                         5 to exclude CABs from the annual
                                                  compliance that would be appropriate
                                                                                                               One commenter expressed concern                     audit requirement, or to require a review
                                                  in these situations. Further, the
                                                                                                            that FINRA will force existing FINRA                   instead of an audit.62
                                                  commenter suggested that a
                                                                                                            members and new applicants who now                        Another commenter suggested that
                                                    40 Id.
                                                                                                            or will operate as so-called ‘‘nickel BDs’’            annual compliance meetings and annual
                                                    41 See   3PM Letter.                                    to become CABs, if for no other reason
                                                    42 Id.                                                  than to vindicate FINRA’s questionable                   55 Id.
                                                                                                                                                                     56 Id.
                                                    43 Id. Rule 211 states that a capital acquisition       statistics of eligible firms.54 This
                                                                                                                                                                     57 See M&R Letter.
                                                  broker or an associated person of a capital
                                                                                                                                                                     58 Rule 411 states that unless otherwise permitted
                                                  acquisition broker must have a reasonable basis to          46 Id.
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                                                  believe that a recommended transaction or                   47 IMS
                                                                                                                                                                   by FINRA, a capital acquisition broker must
                                                                                                                       Letter.                                     suspend all business operations during any period
                                                  investment strategy (as defined in FINRA Rule               48 Foreside   Letter.                                in which it is not in compliance with applicable net
                                                  2111) involving a security or securities is suitable        49 Id.
                                                  for the customer, based on the information obtained                                                              capital requirements set forth in Exchange Act Rule
                                                                                                              50 Id.                                               15c3–1.
                                                  through the reasonable diligence of the broker or
                                                                                                              51 Id.                                                 59 See 3PM Letter.
                                                  associated person to ascertain the customer’s
                                                  investment profile.                                         52 Id.                                                 60 Id.
                                                    44 3PM Letter.                                            53 Q   Advisors Letter.                                61 See IMS Letter.
                                                    45 Id.                                                    54 IMS   Letter.                                       62 See Mehle Letter.




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                                                                                Federal Register / Vol. 81, No. 56 / Wednesday, March 23, 2016 / Notices                                                      15595

                                                  inspections should not be required for                    encouraged the Commission to delay                      arguments with respect to the issues
                                                  CABs.63                                                   approval of the proposal until there has                raised by the proposed rule change. In
                                                                                                            been an opportunity to more fully                       particular, the Commission invites the
                                                  4. Anti-Money Laundering
                                                                                                            explore these issues.69                                 written views of interested persons on
                                                     One commenter requests that the SEC                                                                            whether the proposed rule change is
                                                  work with the appropriate authorities to                  IV. Proceedings to Determine Whether                    inconsistent with Sections 15A(b)(6)
                                                  revisit the AML responsibilities of CABs                  to Approve or Disapprove SR–FINRA–                      and 15A(b)(9), or any other provision, of
                                                  and consider requiring U.S. registered                    2015–054 and Grounds for Disapproval                    the Exchange Act, or the rules and
                                                  entities, such as registered investment                   Under Consideration                                     regulations thereunder.
                                                  advisers, to share certain data with                         The Commission is instituting                           Although there do not appear to be
                                                  FINRA member firms so that all                            proceedings pursuant to Exchange Act                    any issues relevant to approval or
                                                  registered participants may satisfy their                 Section 19(b)(2)(B) to determine                        disapproval that would be facilitated by
                                                  respective compliance obligations in the                  whether the proposed rule change                        an oral presentation of views, data, and
                                                  most complete and accurate manner                         should be approved or disapproved.70                    arguments, the Commission will
                                                  possible.64 In addition, this commenter                   Institution of proceedings appears                      consider, pursuant to Rule 19b–4, any
                                                  sought the SEC’s confirmation that the                    appropriate at this time in view of the                 request for an opportunity to make an
                                                  terms and conditions of the no-action                     legal and policy issues raised by the                   oral presentation.74
                                                  letters initially dated 2004 and extended                 proposal. As noted above, institution of                   Interested persons are invited to
                                                  by subsequent no-action letter in                         proceedings does not indicate that the                  submit written data, views, and
                                                  January 2015 apply to CABs to the                         Commission has reached any                              arguments by April 13, 2016 concerning
                                                  extent that customer identification is                    conclusions with respect to any of the                  whether the proposed rule change
                                                  reasonable performed by a federally                       issues involved. Rather, the Commission                 should be approved or disapproved.
                                                  regulated entity under a contractual                      seeks and encourages interested persons                 Any person who wishes to file a rebuttal
                                                  obligation.65                                             to comment on the issues presented by                   to any other person’s submission must
                                                                                                            the proposed rule change and provide                    file that rebuttal by May 9, 2016.
                                                  5. Form Custody
                                                                                                            the Commission with arguments to                        Comments may be submitted by any of
                                                     One commenter urged FINRA to make                                                                              the following methods:
                                                                                                            support the Commission’s analysis as to
                                                  efforts to have the SEC eliminate the
                                                                                                            whether to approve or disapprove the                    Electronic Comments
                                                  quarterly ‘‘Form Custody’’ FOCUS
                                                                                                            proposal.
                                                  report for CABs.66                                           Pursuant to Exchange Act Section                       • Use the Commission’s Internet
                                                  J. State Regulation                                       19(b)(2)(B),71 the Commission is                        comment form (http://www.sec.gov/
                                                                                                            providing notice of the grounds for                     rules/sro.shtml); or
                                                     One commenter suggested that the                                                                                 • Send an email to rule-comments@
                                                  Commission, FINRA, and NASAA                              disapproval under consideration. In
                                                                                                                                                                    sec.gov. Please include File Number SR–
                                                  should cooperate to more fully analyze                    particular, Exchange Act Section
                                                                                                                                                                    FINRA–2015–02 on the subject line.
                                                  the interaction between the CAB                           15A(b)(6) 72 requires, among other
                                                  proposal and state registration                           things, that FINRA rules must be                        Paper Comments
                                                  requirements to better harmonize the                      designed to prevent fraudulent and                        • Send paper comments in triplicate
                                                  application of these provisions.67 This                   manipulative acts and practices, to                     to Secretary, Securities and Exchange
                                                  commenter suggested that the most                         promote just and equitable principles of                Commission, 100 F Street NE.,
                                                  relevant provisions to it are the                         trade, and, in general, to protect                      Washington, DC 20549–1090.
                                                  proposal’s inclusion of firms that effect                 investors and the public interest. In                   All submissions should refer to File
                                                  securities transactions solely in                         addition, Exchange Act Section                          Number SR–FINRA–2015–054. This file
                                                  connection with the transfer of                           15A(b)(9) 73 requires that FINRA rules                  number should be included on the
                                                  ownership and control of a privately-                     not impose any unnecessary or                           subject line if email is used. To help the
                                                  held company through the purchase,                        inappropriate burden on competition.                    Commission process and review your
                                                  sale, exchange, issuance, repurchase, or                     The Commission believes FINRA’s
                                                                                                                                                                    comments more efficiently, please use
                                                  redemption of, or a business                              proposed rule change raises questions as
                                                                                                                                                                    only one method. The Commission will
                                                  combination involving, securities or                      to whether it is consistent with the
                                                                                                                                                                    post all comments on the Commission’s
                                                  assets of the company, to a buyer that                    requirements of Exchange Act Sections
                                                                                                                                                                    Internet Web site (http://www.sec.gov/
                                                  will actively operate the company or the                  15A(b)(6) and 15A(b)(9).
                                                                                                                                                                    rules/sro.shtml). Copies of the
                                                  business conducted with the assets of                     V. Request for Written Comments                         submission, all subsequent
                                                  the company, in accordance with the                                                                               amendments, all written statements
                                                  terms and conditions of an SEC rule,                        The Commission requests that
                                                                                                            interested persons provide written                      with respect to the proposed rule
                                                  release, interpretation or ‘‘no-action’’                                                                          change that are filed with the
                                                  letter that permits a person to engage in                 submissions of their views, data, and
                                                                                                                                                                    Commission, and all written
                                                  such activities without having to                                                                                 communications relating to the
                                                                                                              69 Id.
                                                  register as a broker or dealer pursuant to                  70 15 U.S.C. 78s(b)(2). Exchange Act Section          proposed rule change between the
                                                  Section 15(b) of the Exchange Act.68                      19(b)(2)(B) provides that proceedings to determine      Commission and any person, other than
                                                     The commenter indicated that it                        whether to disapprove a proposed rule change must
                                                  would welcome the opportunity to work                     be concluded within 180 days of the date of                74 Exchange Act Section 19(b)(2), as amended by
                                                  with FINRA and the Commission on the                      publication of notice of the filing of the proposed     the Securities Acts Amendments of 1975, Pub. L.
jstallworth on DSK7TPTVN1PROD with NOTICES




                                                  issues presented by the proposal, and                     rule change. The time for conclusion of the             94–29, 89 Stat. 97 (1975), grants the Commission
                                                                                                            proceedings may be extended for up to an                flexibility to determine what type of proceeding—
                                                                                                            additional 60 days if the Commission finds good         either oral or notice and opportunity for written
                                                    63 See   Foreside Letter.                               cause for such extension and publishes its reasons      comments—is appropriate for consideration of a
                                                    64 See   3PM Letter.                                    for so finding or if the self-regulatory organization   particular proposal by a self-regulatory
                                                    65 Id.                                                  consents to the extension.                              organization. See Securities Acts Amendments of
                                                    66 Mehle   Letter.                                        71 15 U.S.C. 78s(b)(2)(B).
                                                                                                                                                                    1975, Report of the Senate Committee on Banking,
                                                    67 NASAA    Letter.                                       72 15 U.S.C. 78o–3(b)(6).
                                                                                                                                                                    Housing and Urban Affairs to Accompany S. 249,
                                                    68 Id.                                                    73 15 U.S.C. 78o–3(b)(9).                             S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975).



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                                                  15596                       Federal Register / Vol. 81, No. 56 / Wednesday, March 23, 2016 / Notices

                                                  those that may be withheld from the                     thereunder,4 which renders the                          (iv) amend the Tape B Step Up Tier
                                                  public in accordance with the                           proposed rule change effective upon                     under footnote 2.
                                                  provisions of 5 U.S.C. 552, will be                     filing with the Commission. The
                                                                                                                                                                  Fee Code ZA and the Retail Order Tier
                                                  available for Web site viewing and                      Commission is publishing this notice to
                                                  printing in the Commission’s Public                     solicit comments on the proposed rule                      The Exchange proposes to increase
                                                  Reference Room, 100 F Street NE.,                       change from interested persons.                         the rebate for Retail Orders that yield fee
                                                  Washington, DC 20549, on official                                                                               code ZA and delete the Retail Order
                                                                                                          I. Self-Regulatory Organization’s                       Tier under footnote 4.7 First, the
                                                  business days between the hours of                      Statement of the Terms of Substance of
                                                  10:00 a.m. and 3:00 p.m. Copies of such                                                                         Exchange proposes to increase the
                                                                                                          the Proposed Rule Change                                rebate for Retail Orders that yield fee
                                                  filing also will be available for
                                                  inspection and copying at the principle                    The Exchange filed a proposal to                     code ZA from $0.0032 per share to
                                                  office of FINRA. All comments received                  amend the fee schedule applicable to                    $0.0034 per share. Fee code ZA is
                                                  will be posted without change. The                      Members 5 and non-members of the                        appended to Retail Orders that add
                                                  Commission does not edit personal                       Exchange pursuant to EDGX Rules                         liquidity on the Exchange. In a related
                                                  identifying information from                            15.1(a) and (c) (‘‘Fee Schedule’’) to: (i)              change, the Exchange proposes to delete
                                                  submissions. You should submit only                     Increase the rebate for Retail Orders 6                 the Retail Order Tier under footnote 4.8
                                                  information that you wish to make                       that yield fee code ZA; (ii) delete the                 Currently, under the Retail Order Tier,
                                                  publicly available.                                     Retail Order Tier under footnote 4; (iii)               a Retail Order that yields fee code ZA
                                                                                                          amend or delete various Add Volume                      will receive a rebate of $0.0034 per
                                                     All submissions should refer to File                 Tiers under footnote 1; and (iv) amend                  share where that Member adds Retail
                                                  Number SR–FINRA–2015–054 and                            the Tape B Step Up Tier under footnote                  Orders that average at least 0.07% of
                                                  should be submitted on or before April                  2.                                                      TCV.9 Going forward, Members would
                                                  13, 2016. If comments are received, any                    The text of the proposed rule change                 receive a receive rebate of $0.0034 per
                                                  rebuttal comments should be submitted                   is available at the Exchange’s Web site                 share for their Retail Orders that yield
                                                  by May 9, 2016.                                         at www.batstrading.com, at the                          fee code ZA without having to satisfy
                                                    For the Commission, by the Division of                principal office of the Exchange, and at                certain add volume criteria. Providing
                                                  Trading and Markets, pursuant to delegated              the Commission’s Public Reference                       all Retail Orders that yield fee code ZA
                                                  authority.75                                            Room.                                                   a rebate of $0.0034 per share would
                                                  Robert W. Errett,                                                                                               mirror the rebate currently provided by
                                                                                                          II. Self-Regulatory Organization’s
                                                  Deputy Secretary.
                                                                                                          Statement of the Purpose of, and                        the Nasdaq Stock Market LLC
                                                  [FR Doc. 2016–06453 Filed 3–22–16; 8:45 am]             Statutory Basis for, the Proposed Rule                  (‘‘Nasdaq’’).10
                                                  BILLING CODE 8011–01–P                                  Change                                                  Add Volume Tiers—Footnote 1
                                                                                                             In its filing with the Commission, the                  Currently, the Exchange determines
                                                  SECURITIES AND EXCHANGE                                 Exchange included statements                            the liquidity adding rebate that it will
                                                  COMMISSION                                              concerning the purpose of and basis for                 provide to Members using the
                                                                                                          the proposed rule change and discussed                  Exchange’s tiered pricing structure.
                                                  [Release No. 34–77394; File No. SR–                     any comments it received on the                         Under such pricing structure, a Member
                                                  BatsEDGX–2016–02]                                       proposed rule change. The text of these                 will receive a rebate of anywhere
                                                                                                          statements may be examined at the                       between $0.0025 and $0.0035 per share
                                                  Self-Regulatory Organizations; Bats                     places specified in Item IV below. The                  executed, depending on the volume tier
                                                  EDGX Exchange, Inc.; Notice of Filing                   Exchange has prepared summaries, set                    for which such Member qualifies. The
                                                  and Immediate Effectiveness of a                        forth in Sections A, B, and C below, of                 Exchange currently offers thirteen
                                                  Proposed Rule Change Related to Fees                    the most significant parts of such                      separate Add Volume Tiers under
                                                  for Use of the Exchange                                 statements.                                             footnote 1 of its Fee schedule which
                                                  March 17, 2016.                                         A. Self-Regulatory Organization’s                       provide various enhanced rebates based
                                                     Pursuant to Section 19(b)(1) of the                  Statement of the Purpose of, and the                    on the Members satisfying certain
                                                  Securities Exchange Act of 1934 (the                                                                            monthly volume thresholds. The
                                                                                                          Statutory Basis for, the Proposed Rule
                                                  ‘‘Act’’),1 and Rule 19b–4 thereunder,2                                                                          Exchange now proposes to amend or
                                                                                                          Change
                                                  notice is hereby given that on March 17,                                                                        delete various tiers under footnote 1 in
                                                                                                          1 Purpose                                               order to update, streamline, and simply
                                                  2016, Bats EDGX Exchange, Inc. f/k/a
                                                  EDGX Exchange, Inc. (the ‘‘Exchange’’                      The Exchange proposes to amend its                   its tiered pricing structure.
                                                  or ‘‘EDGX’’) filed with the Securities                  Fee Schedule to: (i) Increase the rebate                Tiers To Be Deleted
                                                  and Exchange Commission                                 for Retail Orders that yield fee code ZA;
                                                                                                                                                                    First, the Exchange proposes to delete
                                                  (‘‘Commission’’) the proposed rule                      (ii) delete the Retail Order Tier under
                                                                                                                                                                  the Market Depth Tier 1 and Market
                                                  change as described in Items I and II                   footnote 4; (iii) amend or delete various
                                                  below, which Items have been prepared                   Add Volume Tiers under footnote 1; and                     7 Footnote 4 would continue to note that
                                                  by the Exchange. The Exchange has                                                                               Members will only be able to designate their orders
                                                                                                            4 17  CFR 240.19b–4(f)(2).
                                                  designated the proposed rule change as                                                                          as Retail Orders on either an order-by-order basis
                                                                                                            5 The   term ‘‘Member’’ is defined as ‘‘any           using FIX ports or by designating certain of their
                                                  one establishing or changing a member                                                                           FIX ports at the Exchange as ‘‘Retail Order Ports.’’
                                                                                                          registered broker or dealer that has been admitted
                                                  due, fee, or other charge imposed by the                to membership in the Exchange.’’ See Exchange              8 As a result of deleting the Retail Order Tier
jstallworth on DSK7TPTVN1PROD with NOTICES




                                                  Exchange under Section 19(b)(3)(A)(ii)                  Rule 1.5(n).                                            under footnote 4, the Exchange proposes to delete
                                                  of the Act 3 and Rule 19b–4(f)(2)                          6 A ‘‘Retail Order’’ is ‘‘an order that: (i) Is an   a reference to footnote 4 in the Standard Rates table
                                                                                                          agency order or riskless principal order that meets     of its Fee Schedule.
                                                                                                                                                                     9 As defined in the Exchange’s Fee Schedule.
                                                    75 17 CFR 200.30–3(a)(12); 17 CFR 200.30–
                                                                                                          the criteria of FINRA Rule 5320.03 that originates
                                                                                                          from a natural person; (ii) is submitted to EDGX by        10 See Nasdaq Price List—Trading Connectivity
                                                  3(a)(57).                                               a Member, provided that no change is made to the        available at http://www.nasdaqtrader.com/
                                                    1 15 U.S.C. 78s(b)(1).
                                                                                                          terms of the order; and (iii) does not originate from   Trader.aspx?id=PriceListTrading2 (offering a rebate
                                                    2 17 CFR 240.19b–4.
                                                                                                          a trading algorithm or any other computerized           of $0.0034 per share to add displayed designated
                                                    3 15 U.S.C. 78s(b)(3)(A)(ii).                         methodology.’’ See Exchange Rule 11.24(a).              retail liquidity).



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Document Created: 2016-03-23 00:03:55
Document Modified: 2016-03-23 00:03:55
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation81 FR 15588 

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