81 FR 21924 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change To Adopt FINRA Rule 3210 (Accounts at Other Broker-Dealers and Financial Institutions), as Modified by Partial Amendment No. 1 and Partial Amendment No. 2, in the Consolidated FINRA Rulebook

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 71 (April 13, 2016)

Page Range		21924-21928
FR Document		2016-08423
Federal Register, Volume 81 Issue 71 (Wednesday, April 13, 2016)
[Federal Register Volume 81, Number 71 (Wednesday, April 13, 2016)]
[Notices]
[Pages 21924-21928]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-08423]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77550; File No. SR-FINRA-2015-029]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Adopt FINRA 
Rule 3210 (Accounts at Other Broker-Dealers and Financial 
Institutions), as Modified by Partial Amendment No. 1 and Partial 
Amendment No. 2, in the Consolidated FINRA Rulebook

April 7, 2016

I. Introduction

    On July 31, 2015, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt a new, consolidated rule 
addressing accounts opened or established by associated persons of 
members at firms other than the firm with which they are associated.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on August 14, 2015.\3\ The comment period closed on September 
4, 2015. On September 22, 2015, FINRA extended the time period in which 
the Commission must approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
approve or disapprove the proposed rule change to November 12, 2015. 
The Commission received four comment letters in response to the 
Notice.\4\ On November 10, 2015, FINRA responded to the comments and 
filed Partial Amendment No. 1 to the current proposal.\5\ On November 
12, 2015, the Commission issued an order instituting proceedings 
pursuant to Exchange Act section 19(b)(2)(B) \6\ to determine whether 
to approve or disapprove the proposed rule change, as modified by 
Partial Amendment No. 1.\7\ The Commission received one (1) comment 
letter in response to the Order Instituting Proceedings.\8\ On February 
10, 2016, the Commission published a notice extending the time period 
in which the Commission must determine whether to approve or disapprove 
the proposed rule change to April 8, 2016.\9\ On March 2, 2016, FINRA 
responded to the comment letter received in response to the Order 
Instituting Proceedings and filed Partial Amendment No. 2.\10\
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    \3\ See Exchange Act Rel. No. 75655 (Aug. 10, 2015), 80 FR 48941 
(Aug. 14, 2015) (File No. SR-FINRA-2015-029) (``Notice'').
    \4\ See Letters from Eric Arnold and Clifford Kirsch, Sutherland 
Asbill & Brennan LLP (for the Committee of Annuity Insurers), dated 
September 4, 2015 (``Sutherland Letter''); Michael J. Hogan, 
President and Chief Executive Officer, FOLIOfn Investments, Inc., 
dated September 4, 2015 (``FOLIOfn Letter''); Joseph C. Peiffer, 
President, Public Investors Arbitration Bar Association (``PIABA''), 
dated September 3, 2015 (``PIABA Letter''); and Kevin Zambrowicz, 
Associate General Counsel & Managing Director, and Stephen Vogt, 
Assistant Vice President & Assistant General Counsel, Securities 
Industry and Financial Markets Association (``SIFMA''), dated 
September 3, 2015 (``SIFMA Letter''). Comment letters are available 
at www.sec.gov. The Commission discussed these comments in the Order 
Instituting Proceedings. See infra note 7.
    \5\ See Letter from Patrice Gliniecki, Senior Vice President and 
Deputy General Counsel, FINRA, to the Commission, dated November 10, 
2015 (``FINRA Response Letter''). The FINRA Response Letter and the 
text of Partial Amendment No. 1 are available on FINRA's Web site at 
http://www.finra.org, at the principal office of FINRA, at the 
Commission's Web site at http://www.sec.gov/rules/sro/finra/2015/34-75655.pdf, and at the Commission's Public Reference Room.
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Exchange Act Release No. 76430 (Nov. 12, 2015), 80 FR 
72118 (Nov. 18, 2015) (Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove Proposed Rule Change to Adopt FINRA 
Rule 3210 (Accounts at Other Broker-Dealers and Financial 
Institutions), as Modified by Partial Amendment No. 1) (``Order 
Instituting Proceedings'')). The comment period closed on December 
9, 2015.
    \8\ See Letter from Laura Crosby-Brown, dated November 13, 2015 
(``Crosby-Brown Letter'').
    \9\ See Exchange Act Release No. 77103 (Feb. 10, 2016), 81 FR 
8109 (Feb. 17, 2016) (Notice of Designation of a Longer Period for 
Commission Action on Proceedings to Determine Whether to Approve or 
Disapprove a Proposed Rule Change to Adopt FINRA Rule 3210 (Accounts 
at Other Broker-Dealers and Financial Institutions), as Modified by 
Partial Amendment No. 1, in the Consolidated FINRA Rulebook).
    \10\ See Letter from Patrice Gliniecki, Senior Vice President 
and Deputy General Counsel, FINRA, to the Commission, dated March 2, 
2016 (``FINRA's Second Letter''). FINRA's Second Letter and the text 
of Partial Amendment No. 2 are available on FINRA's Web site at 
http://www.finra.org, at the principal office of FINRA, and at the 
Commission's Public Reference Room.
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    This order approves the proposed rule change, as modified by 
Partial Amendment No. 1 and Partial Amendment No. 2 (collectively, the 
``Amendments'').\11\
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    \11\ The text of the proposed rule changes is available at the 
principal office of FINRA, on FINRA's Web site at http://www.finra.org, and at the Commission's Public Reference Room. In 
addition, you may also find a more detailed description of the 
original proposed rule change, as amended by Amendment No. 1, in the 
Notice, and Order Instituting Proceedings.
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II. Description of the Proposed Rule Change \12\
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    \12\ The proposed rule change, as described in this Item II, is 
excerpted, in part, from the Notice, which was substantially 
prepared by FINRA. See Notice.
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    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\13\ FINRA is proposing to adopt new 
FINRA Rule 3210 (Accounts at Other Broker-Dealers and Financial 
Institutions) in the Consolidated FINRA Rulebook, and to delete NASD 
Rule 3050, Incorporated New York Stock Exchange (``NYSE'') Rules 407 
and 407A, and Incorporated NYSE Rule Interpretations 407/01 and 407/
02.\14\
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    \13\ The current FINRA rulebook consists of: (1) FINRA Rules; 
(2) NASD Rules; and (3) rules incorporated from NYSE (``Incorporated 
NYSE Rules''). See id.
    \14\ For convenience, the Incorporated NYSE Rules are referred 
to as the ``NYSE Rules.''
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A. Current NASD Rule 3050

    Current NASD Rule 3050 provides a means to inform member firms 
about transactions effected by their associated persons in accounts 
established outside the firm. This information gives members an 
opportunity to weigh the effect these accounts may have on the firm and 
its customers.\15\ The rule imposes specified obligations on

[[Page 21925]]

member firms and associated persons, including:
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    \15\ See Exchange Act Release No. 4924 (Aug. 21, 1953).
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     Obligations of Member Firms: NASD Rule 3050(a) requires 
that a member (called an ``executing member'') that knowingly executes 
a transaction for the purchase or sale of a security for the account of 
a person associated with another member (called an ``employer 
member''), or for any account over which the associated person has 
discretionary authority, must use reasonable diligence to determine 
that the execution of the transaction will not adversely affect the 
interests of the employer member. NASD Rule 3050(b) requires that, when 
an executing member knows that a person associated with an employer 
member has or will have a financial interest in, or discretionary 
authority over, any existing or proposed account carried by the 
executing member, the executing member must:
    (1) Notify the employer member in writing, prior to the execution 
of a transaction for the account, of the executing member's intention 
to open or maintain that account;
    (2) upon written request by the employer member, transmit duplicate 
copies of confirmations, statements, or other information with respect 
to the account; and
    (3) notify the person associated with the employer member of the 
executing member's intention to provide the notice and information 
required by (1) and (2), above.
     Obligations of Associated Persons: Associated persons who: 
(1) Open securities accounts or place securities orders through (a) a 
member firm other than their employer, or (b) other financial 
institution that is not a FINRA member, and (2) have a financial 
interest in, or discretionary authority over, such accounts or orders 
\16\ must comply with the following:
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    \16\ See NASD Rule 3050(e).
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    (1) NASD Rule 3050(c) requires that a person associated with a 
member, prior to opening an account or placing an initial order for the 
purchase or sale of securities with another member, must notify both 
the employer member and the executing member, in writing, of his or her 
association with the other member. The rule also provides that if the 
account was established prior to the person's association with the 
employer member, the person must notify both members in writing 
promptly after becoming associated; and
    (2) NASD Rule 3050(d) provides that if the associated person opens 
a securities account or places an order for the purchase or sale of 
securities with a broker-dealer that is registered pursuant to Exchange 
Act section 15(b)(11) (a notice-registered broker-dealer), a domestic 
or foreign investment adviser, bank, or other financial institution 
(i.e., firms that are not FINRA members), then he or she must: (i) 
Notify his or her employer member in writing, prior to the execution of 
any initial transactions, of the intention to open the account or place 
the order; and (ii) upon written request by the employer member, 
request in writing and assure that the notice-registered broker-dealer, 
investment adviser, bank, or other financial institution provides the 
employer member with duplicate copies of confirmations, statements, or 
other information concerning the account or order. NASD Rule 3050(d) 
also provides that if an account subject to Rule 3050(d) was 
established prior to the person's association with the member, the 
person must comply with the rule promptly after becoming associated.
    In addition, NASD Rule 3050(f) provides that the requirements of 
Rule 3050 do not apply to transactions in unit investment trusts and 
variable contracts or redeemable securities of companies registered 
under the Investment Company Act of 1940 (``Investment Company Act''), 
or to accounts which are limited to transactions in such securities.

B. Current NYSE Rules 407 and 407A

    The purpose of NYSE Rule 407 is similar to the purpose of FINRA 
Rule 3050--to provide member firms information about transactions 
effected by their associated persons in accounts established outside 
their firm. According to FINRA, the NYSE and NASD rules are similar 
with some variations, including:
     NYSE Rule 407(a) is similar to NASD Rule 3050(b), except 
that Rule 407(a) requires that an executing member receive an employer 
member's prior written consent before: (1) Opening a securities or 
commodities account, or (2) executing any transaction in which a member 
or employee associated with another member or member organization is 
directly or indirectly interested. The rule also requires that 
duplicate confirmations and account statements be sent promptly to the 
employer.
     NYSE Rule 407(b) is similar to NASD Rules 3050(c) and (d), 
except that Rule 407(b) generally requires that associated persons who: 
(1) Establish or maintain a securities or commodities account, or enter 
into a securities transaction at (a) another member firm, or (b) a 
domestic or foreign non-member broker-dealer, investment adviser, bank, 
or other financial institution,\17\ and (2) have a financial interest 
in, or discretionary authority over, such accounts or transactions must 
obtain the employer firm's prior written consent. The rule also 
requires that persons having accounts or effecting transactions as 
covered by the rule must arrange for duplicate confirmations and 
statements (or their equivalents) to be sent to the employer firm. The 
rule further requires that all such accounts and transactions must 
periodically be reviewed by the employer member.
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    \17\ NYSE Rule 407.13 states that, for purposes of the rule, the 
term ``other financial institution'' includes, but is not limited 
to, insurance companies, trust companies, credit unions, and 
investment companies.
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     NYSE Rule 407.12 is similar to NASD Rule 3050(f), except 
that Rule 407.12 excepts the specified transactions and accounts (i.e., 
transactions in unit investment trusts and variable contracts or 
redeemable securities of companies registered under the Investment 
Company Act, or to accounts which are limited to transactions in such 
securities, or to monthly investment plan type accounts) only from the 
obligation to send duplicate confirmations and statements unless 
requested by the employer.
    In addition, NYSE Rule 407A (Disclosure of All Member Accounts) 
requires members to promptly report to the NYSE any securities account 
(including accounts at a member or non-member broker-dealer, investment 
adviser, bank or other financial institution), in which the member has 
a financial interest or the power to make investment decisions. NYSE 
Rule 407A also requires a member having such an account to notify the 
financial institution that carries or services the account that it is a 
member of the NYSE. In addition, the rule requires that members report 
to the NYSE when any such securities account is closed. FINRA states 
that ``[t]hese reporting requirements were designed to provide the NYSE 
with current information about where floor members carry securities 
accounts.'' \18\
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    \18\ See Notice.
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    NYSE Rule Interpretation 407/01 addresses the process for 
determining whether the account of a spouse of an associated person 
should be subject to NYSE Rule 407.
    NYSE Rule Interpretation 407/02 provides that NYSE Rule 407(b) 
applies when an associated person is also a majority stockholder of a 
non-public corporation that wishes to open a discretionary margin 
account at another member.

[[Page 21926]]

C. Proposed New FINRA Rule 3210, as Amended by Partial Amendment No. 1 
\19\
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    \19\ The description in this section describes the proposed rule 
change prior to Partial Amendment No. 2, which is described in 
section D below.
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    Proposed FINRA Rule 3210(a) would require an associated person to 
obtain his or her employer firm's prior written consent before opening 
or otherwise establishing an account in which securities transactions 
can be effected and in which the associated person has a beneficial 
interest at a member other than the employer member (i.e., executing 
member), or at any other financial institution.\20\ Proposed FINRA Rule 
3210.02, as amended by Partial Amendment No. 1, would establish a 
rebuttable presumption that an associated person has a beneficial 
interest in an account held by an individual listed in proposed Rule 
3210.02(a)-(d). Specifically, under the proposal, an associated person 
would be presumed (not deemed) to have a beneficial interest in any 
account that is held by: (a) The spouse of the associated person, 
provided that the spouse resides in the same household as the 
associated person; \21\ (b) a child of the associated person or of the 
associated person's spouse, provided that the child resides in the same 
household as or is financially dependent upon the associated person; 
(c) any other related individual over whose account the associated 
person has control; or (d) any other individual over whose account the 
associated person has control and to whose financial support the 
associated person materially contributes. Moreover, proposed FINRA 
3210.02, as amended by Partial Amendment No. 1, would allow an 
associated person to overcome the presumption of beneficial interest in 
an account by ``[demonstrating], to the satisfaction of the employer 
member, that the associated person derives no economic benefit from the 
account.'' \22\ Notably, the proposal would also ``[eliminate] the 
language in the current rules that references accounts or transactions 
where the associated person has `the power, directly or indirectly, to 
make investment decisions,' as set forth in NYSE Rule 407(b), and 
accounts where the associated person has `discretionary authority,' as 
set forth in NASD Rule 3050(b).'' \23\
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    \20\ Based on NYSE Rule 407.13 and NASD Rule 3050(d), proposed 
FINRA Rule 3210.05 provides that the terms ``other financial 
institution'' and ``financial institution other than a member'' 
include, but are not limited to, any broker-dealer that is 
registered pursuant to Exchange Act Section 15(b)(11), domestic or 
foreign non-member broker-dealer, investment adviser, bank, 
insurance company, trust company, credit union, and investment 
company.
    \21\ As originally proposed, proposed Rule 3210.02 would have 
deemed an associated person to have a beneficial interest in any 
account held by a spouse, regardless of residence.
    \22\ As originally proposed, proposed Rule 3210.02 would have 
deemed (not presumed) an associated person to have a beneficial 
interest in any account that is held by an individual listed in Rule 
3210.02(a)-(d) for purposes of Rule 3210.
    \23\ See Notice.
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    Proposed FINRA Rule 3210(b) would require an associated person to 
provide written notice to the executing member, or other financial 
institution, of his or her association with the employer member prior 
to opening or otherwise establishing an account subject to the rule.
    Proposed FINRA Rule 3210(c) would require an executing member, upon 
written request by the employer member, to transmit duplicate copies of 
confirmations and statements, or the transactional data contained 
therein, with respect to an account subject to the rule.
    Proposed FINRA Rule 3210.01 would require an associated person to 
obtain the written consent of the employer member, within 30 calendar 
days of becoming so associated, to maintain an account that was opened 
or otherwise established prior to the person's association with the 
employer member. The proposed rule also would require the associated 
person to notify in writing the executing member or other financial 
institution of his or her association with the employer member.
    Proposed FINRA Rule 3210.03, as amended by Amendment No. 1, would 
exclude from the requirements of FINRA Rule 3210 transactions in unit 
investment trusts, municipal fund securities as defined under MSRB Rule 
D-12, qualified tuition programs pursuant to section 529 of the 
Internal Revenue Code, and variable contracts or redeemable securities 
of companies registered under the Investment Company Act, as amended, 
or to accounts that are limited to transactions in such securities, or 
to monthly investment plan type accounts.\24\
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    \24\ As originally proposed, proposed Rule 3210 would have 
exempted transactions in unit investment trusts, municipal fund 
securities as defined under MSRB Rule D-12, qualified tuition 
programs pursuant to section 529 of the Internal Revenue Code, and 
variable contracts or redeemable securities of companies registered 
under the Investment Company Act, as amended, or accounts that are 
limited to transactions in such securities, or monthly investment 
plan type accounts from only subpart (c) of Rule 3210 (discussed 
above).
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    Proposed FINRA Rule 3210.04 would require an employer member to 
consider the extent to which it would be able to obtain, upon written 
request, duplicate copies of confirmations and statements, or the 
transactional data contained therein, directly from the non-member 
financial institution in determining whether to provide its written 
consent to an associated person to open or maintain an account subject 
to the rule at a financial institution other than a member.

D. Partial Amendment No. 2

    FINRA subsequently amended Supplementary Material .02 (``Beneficial 
Interests'' \25\) to proposed Rule 3210, as amended by Partial 
Amendment No. 1, by:
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    \25\ FINRA also proposes revising the header for Supplementary 
Material .02 to read ``Related and Other Persons,'' in order to more 
accurately reflect the content identified in subparts (a) through 
(d). See FINRA's Second Letter.
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     Adding the phrase ``and to have established'' in the first 
sentence of Supplementary Material .02 to clarify that the associated 
person would not only be presumed to have a beneficial interest in the 
accounts specified in Supplementary Material .02(a) through .02(d), but 
also that the accounts would be presumed to be established by the 
associated person. FINRA believes this language will clarify that these 
accounts are covered within the meaning of the phrase ``open or 
otherwise establish'' as used in proposed Rule 3210(a); \26\
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    \26\ See FINRA's Second Letter.
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     Revising the last sentence of Supplementary Material .02 
to read: ``For purposes of paragraphs (a) and (b) of this Supplementary 
Material .02, an associated person need not be presumed to have a 
beneficial interest in, or to have established, an account if the 
associated person demonstrates, to the reasonable satisfaction of the 
employer member, that the associated person derives no economic benefit 
from, and exercises no control over, the account.'' FINRA believes that 
adding ``For purposes of paragraphs (a) and (b) of this Supplementary 
Material .02'' is an appropriate clarification, given that the accounts 
specified in paragraphs (c) and (d) under the Supplementary Material 
involve control by the associated person, and therefore ``there would 
be no meaningful purpose in attempting to rebut the presumption'' of 
beneficial interest for accounts controlled by the associated person. 
FINRA also believes that adding the phrase ``reasonable satisfaction of 
the employer member'' would clarify that FINRA expects an employer 
member's determination that the associated person has rebutted the 
presumption to be reasonable. Moreover, FINRA believes that including 
the phrase ``and exercises no control over'' would clarify that the 
associated person would need to

[[Page 21927]]

demonstrate not only that he or she derives no economic interest from 
the account, but also that he or she is not exercising any trading 
authority.\27\
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    \27\ See FINRA's Second Letter. FINRA also believes that 
permitting an associated person to rebut a presumption of beneficial 
interest in a spouse's account gives employer members flexibility to 
consider diverse familial circumstances, such as separation. See 
FINRA's Second Letter; see also SIFMA Letter (stating that ``[i]t is 
not uncommon for spouses to maintain completely separate financial 
lives.'').
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     Deleting the phrase ``provided that the spouse resides in 
the same household as the associated person.'' In so doing, an 
associated person would be presumed to have a beneficial interest in, 
and to have established, the account of a spouse, without regard to 
whether the spouse resides with the associated person. In support of 
this amendment, FINRA notes that the proposed amendment is consistent 
with existing FINRA Rule 3110(d)(4)(A)(i).\28\ FINRA also believes that 
presuming an associated person has a beneficial interest in a spouse's 
account, regardless of residency, would help ensure the appropriate 
regulatory oversight of accounts that associated persons could 
misuse.\29\ In addition, FINRA believes that the proposed rebuttable 
presumption would ``afford adequate flexibility for employer members to 
exclude accounts that pose little or no supervisory risk.'' \30\ FINRA 
recognizes that the requirement to rebut this presumption may create a 
new obligation for associated persons.\31\ On balance, however, FINRA 
believes that the potential costs to associated persons are outweighed 
by the aforementioned regulatory benefits.\32\
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    \28\ See FINRA's Second Letter. As stated in FINRA Rule 
3110(d)(1)(D), ``Each member shall include in its supervisory 
procedures a process for the review of securities transactions that 
are reasonably designed to identify trades that may violate the 
provisions of the Exchange Act, the rules thereunder, or FINRA rules 
prohibiting insider trading and manipulative and deceptive device 
that are effected for the . . . covered accounts.'' ``Covered 
accounts'' are later defined as including ``any account introduced 
or carried by the member that is held by . . . the spouse of a 
person associated with the member.'' FINRA Rule 3110(d)(4)(A)(i).
    \29\ See FINRA's Second Letter; but see FINRA Response Letter 
(stating that it is aware of ``the potential difficulties that could 
arise with respect to spouse accounts as proposed in the original 
filing.'').
    \30\ See FINRA Response letter.
    \31\ See FINRA's Second Letter.
    \32\ Id.
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III. Description of Comments on the Proposal as Amended by Partial 
Amendment No. 1

    As noted above, the Commission received one (1) comment letter in 
response to the Order Instituting Proceedings.\33\ The commenter argued 
that certain broker-dealers do not engage in businesses that could lead 
to the types of violations that the proposed new rules are designed to 
help prevent. Accordingly, the commenter encouraged FINRA to amend the 
proposal to ``allow firms to decide based on their business model and 
potential risks whether or not to require the approval of outside 
accounts and whether the firm must receive statements or transition 
reports.'' \34\
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    \33\ See Crosby-Brown Letter.
    \34\ Id.
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    In response to this commenter, FINRA cited ``the core supervisory 
objective that gives rise to the need for the rulemaking . . . 
discussed in the original filing and in the Partial Amendment No. 1.'' 
\35\ FINRA further stated that ``sound supervisory practices require 
that a member firm monitor personal accounts opened or established 
outside of the firm by its associated persons.'' \36\ FINRA also stated 
that it believes the proposed rule would ``help facilitate effective 
oversight of the specified trading activities of associated persons of 
member'' \37\ by, among other things, ``provid[ing] employer members 
reasonable flexibility to craft appropriate supervisory policies and 
procedures according to their business model and the risk profile of 
their activities.'' \38\ Accordingly, FINRA declined to make the 
suggested changes.
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    \35\ See FINRA's Second Letter.
    \36\ See Notice; see also FINRA Response Letter.
    \37\ Id.
    \38\ See FINRA Response Letter; see also Notice.
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IV. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change, 
the comments received, and FINRA's responses to the comments and 
proposed Amendments. Based on its review of the record, the Commission 
finds that the proposal is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder applicable to a 
national securities association.\39\ In particular, the Commission 
finds that the proposal is consistent with Exchange Act section 
15A(b)(6), which requires, among other things, that FINRA's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest.\40\
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    \39\ In approving this proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \40\ 15 U.S.C. 78o-3(b)(6).
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    As stated above, the proposal would update and consolidate into the 
FINRA Rulebook NASD and NYSE rules that each govern a broker-dealer's 
oversight of accounts established by their associated persons at other 
broker-dealers and other financial institutions. As discussed above, 
the proposed rule would, among other things: (1) Provide an associated 
person with the opportunity to rebut a presumption that he or she has a 
beneficial interest in an account established by certain related and 
other persons; (2) require an associated person to obtain his or her 
employer firm's prior written consent before opening or otherwise 
establishing an account in which securities transactions can be 
effected and in which the associated person has a beneficial interest 
at a member other than the employer member, or at any other financial 
institution; (3) require an associated person to provide written notice 
to the executing member, or other financial institution, of his or her 
association with the employer member prior to opening or otherwise 
establishing an account subject to the rule; and (4) require an 
executing member, upon written request by the employer member, to 
transmit duplicate copies of confirmations and statements, or the 
transactional data contained therein, with respect to an account 
subject to the rule.
    As stated in the Notice, FINRA designed the proposed rule change to 
help ``facilitate the supervision of the trading activities of 
associated persons within the framework of FINRA's . . . supervisory 
rules.'' \41\ More specifically, FINRA believes the proposed rule 
change would ``help members ensure that such activities, engaged in at 
executing members or other financial institutions, do not violate 
provisions of the [Exchange] Act, its regulations, or FINRA rules, 
thereby helping to ensure orderly markets.'' \42\
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    \41\ See Notice; see also FINRA Response Letter.
    \42\ See Notice; see also FINRA Response Letter.
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    The Commission recognizes one commenter's concern that not 
requiring a member firm to obtain a duplicate account statement that 
reflects every associated person's covered transactions unless the 
account statement is requested in writing might negatively affect a 
broker-dealer's ability to monitor, and thus, supervise trading by its 
associated persons.\43\ The Commission also recognizes, however, that 
FINRA believes the proposal would create sufficient flexibility for 
members to ``craft appropriate supervisory

[[Page 21928]]

policies and procedures according to their business model and the risk 
profile of their activities'' \44\ and that requiring delivery of 
duplicate account statements would eliminate this flexibility. More 
importantly, FINRA Rule 3110 regarding broker-dealer supervision 
establishes the obligation for a member to include in its supervisory 
procedures a process for the review of securities transactions that 
are/is reasonably designed to identify trades that may violate the 
provisions of the Exchange Act, the rules thereunder, or FINRA rules 
prohibiting insider trading and manipulative and deceptive practices 
that are effected for, among other things, covered accounts.
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    \43\ See PIABA Letter; also see Notice and Order Instituting 
Proceedings.
    \44\ See FINRA Response Letter; also see Notice and Order 
Instituting Proceedings.
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    In consolidating the overlapping rules, FINRA proposed deleting 
certain provisions \45\ and amending other provisions. In particular, 
the proposed rule change would amend the definition of ``beneficial 
interest'' to create a rebuttable presumption that an associated person 
holds a beneficial interest in the financial accounts of certain 
related and other persons. The Commission recognizes commenters' 
concerns that, as a result of this change, an associated person may not 
always be able to obtain a spouse's duplicate account statements. 
Specifically, the two commenters argued that family arrangements are 
diverse, and that an associated person could have difficulty complying 
with the rule in the event of pending separation or divorce from a 
spouse.\46\ One of the commenters also suggested that these concerns 
could extend, for example, to the accounts of a child of an associated 
person's spouse.\47\ However, we believe that FINRA's proposal strikes 
an appropriate balance between the regulatory interests in facilitating 
adequate supervision over accounts in which the associated person has a 
beneficial interest, and the possibility that an associated person may 
not be able to obtain duplicate account statements in certain limited 
circumstances.
---------------------------------------------------------------------------

    \45\ For example, the proposed rule would not include existing 
NASD rules that affect accounts over which associated persons make 
investment decisions or have discretionary authority to the proposed 
new rule. FINRA believes that the activities in these types of 
accounts involve private securities transactions subject to FINRA 
Rule 3280, making application of the proposed new rule redundant. 
See Notice and FINRA's Response Letter.
    \46\ See SIFMA Letter; FOLIOfn Letter.
    \47\ See FOLIOfn Letter.
---------------------------------------------------------------------------

    Another commenter argued that additional types of transactions and 
accounts should be excluded from the obligations of the proposed rule, 
asserting that they pose limited risks with respect to the need to 
oversee associated persons' accounts.\48\ This commenter recommended 
that FINRA exempt transactions in ``all insurance contracts that are 
securities'' from the obligation to provide the employer member with 
duplicate account documents.\49\ Although FINRA declined to except 
insurance products from the rule's requirements, it agreed to 
``consider whether further exceptions are appropriate based on the 
attributes of specific insurance products.'' \50\
---------------------------------------------------------------------------

    \48\ See Sutherland Letter.
    \49\ Id.
    \50\ See FINRA Response Letter; see also Order Instituting 
Proceedings.
---------------------------------------------------------------------------

    In sum, the Commission believes that the proposal would help 
protect investors and the public interest by establishing a framework 
through which a member can adequately supervise securities-related 
activities of their associated persons at firms other than the one with 
which they are associated.\51\ We also believe this rule makes the core 
supervisory obligation more operationally workable for employer firms.
---------------------------------------------------------------------------

    \51\ FINRA Rule 3110(d) (Transaction Review and Investigation) 
requires that a member's supervisory procedures include a process 
for reviewing securities transactions effected in, among others, 
accounts of their associated persons, reasonably designed to 
identify trades that may violate the provisions of the Exchange Act, 
its regulations, or FINRA rules prohibiting insider trading and 
manipulative and deceptive devices. See FINRA Response Letter.
---------------------------------------------------------------------------

    In addition, the proposal enables members to design a supervisory 
system that suits their respective business model and risk profiles. In 
this regard, the proposal would allow firms to decide, based on their 
respective business model and potential risks, whether to approve 
outside accounts and whether the firm wants to receive duplicate 
account statements and other related account documents. For example, 
FINRA states that members could impose obligations on their associated 
persons beyond those required by the proposal, such as ``tak[ing] a 
more expansive view of the accounts the associated person should 
disclose than is otherwise required by the [proposed] rule.'' \52\
---------------------------------------------------------------------------

    \52\ See FINRA Response Letter; see also FINRA Response Letter 
(stating that ``the rule [does not] limit the employer member's 
discretion to set requirements with respect to the holding of 
outside accounts''); see also FINRA Response Letter (stating that 
``the rule does not prevent employer members from crafting policies 
and procedures that require associated persons to disclose the types 
of transactions and accounts specified under [proposed FINRA Rule 
3210.03] and to provide related information'').
    Similarly, FINRA notes that ``the rule does not limit the 
discretion of executing members to craft policies and procedures 
with respect to the account activity of persons associated with 
other firms.'' See FINRA Response Letter.
---------------------------------------------------------------------------

    The Commission believes that FINRA gave due consideration to the 
proposal and met the requirements of the Exchange Act. For these 
reasons, the Commission finds that the proposed rule change is 
consistent with the Exchange Act and the rules and regulations 
thereunder.

V. Conclusion

    It is therefore ordered pursuant to Exchange Act section 19(b)(2) 
\53\ that the proposal (SR-FINRA-2015-029), as modified by the 
Amendments, be and hereby is approved.
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\54\
---------------------------------------------------------------------------

    \54\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-08423 Filed 4-12-16; 8:45 am]
 BILLING CODE 8011-01-P
21924 Federal Register / Vol. 81, No. 71 / Wednesday, April 13, 2016 / Notices

amendments, all written statements opened or established by associated approve or disapprove the proposed
with respect to the proposed rule persons of members at firms other than rule change to April 8, 2016.9 On March
change that are filed with the the firm with which they are associated. 2, 2016, FINRA responded to the
Commission, and all written The proposed rule change was comment letter received in response to
communications relating to the published for comment in the Federal the Order Instituting Proceedings and
proposed rule change between the Register on August 14, 2015.3 The filed Partial Amendment No. 2.10
Commission and any person, other than comment period closed on September 4, This order approves the proposed rule
those that may be withheld from the 2015. On September 22, 2015, FINRA change, as modified by Partial
public in accordance with the extended the time period in which the Amendment No. 1 and Partial
provisions of 5 U.S.C. 552, will be Commission must approve the proposed Amendment No. 2 (collectively, the
available for Web site viewing and rule change, disapprove the proposed ‘‘Amendments’’).11
printing in the Commission’s Public rule change, or institute proceedings to
Reference Room, 100 F Street NE., determine whether to approve or II. Description of the Proposed Rule
Washington, DC 20549 on official disapprove the proposed rule change to Change 12
business days between the hours of November 12, 2015. The Commission
received four comment letters in As part of the process of developing
10:00 a.m. and 3:00 p.m. Copies of such
response to the Notice.4 On November a new consolidated rulebook
filing also will be available for
10, 2015, FINRA responded to the (‘‘Consolidated FINRA Rulebook’’),13
inspection and copying at the principal
comments and filed Partial Amendment FINRA is proposing to adopt new
offices of the Exchange. All comments
received will be posted without change; No. 1 to the current proposal.5 On FINRA Rule 3210 (Accounts at Other
the Commission does not edit personal November 12, 2015, the Commission Broker-Dealers and Financial
identifying information from issued an order instituting proceedings Institutions) in the Consolidated FINRA
submissions. You should submit only pursuant to Exchange Act section Rulebook, and to delete NASD Rule
information that you wish to make 19(b)(2)(B) 6 to determine whether to 3050, Incorporated New York Stock
available publicly. All submissions approve or disapprove the proposed Exchange (‘‘NYSE’’) Rules 407 and
should refer to File Number SR– rule change, as modified by Partial 407A, and Incorporated NYSE Rule
NASDAQ–2016–053, and should be Amendment No. 1.7 The Commission Interpretations 407/01 and 407/02.14
submitted on or before May 4, 2016. received one (1) comment letter in A. Current NASD Rule 3050
For the Commission, by the Division of
response to the Order Instituting
Trading and Markets, pursuant to delegated Proceedings.8 On February 10, 2016, the Current NASD Rule 3050 provides a
authority.17 Commission published a notice means to inform member firms about
Robert W. Errett, extending the time period in which the transactions effected by their associated
Commission must determine whether to persons in accounts established outside
Deputy Secretary.
the firm. This information gives
[FR Doc. 2016–08425 Filed 4–12–16; 8:45 am] 3 See Exchange Act Rel. No. 75655 (Aug. 10, members an opportunity to weigh the
BILLING CODE 8011–01–P 2015), 80 FR 48941 (Aug. 14, 2015) (File No. SR– effect these accounts may have on the
FINRA–2015–029) (‘‘Notice’’).
4 See Letters from Eric Arnold and Clifford
firm and its customers.15 The rule
Kirsch, Sutherland Asbill & Brennan LLP (for the imposes specified obligations on
SECURITIES AND EXCHANGE
Committee of Annuity Insurers), dated September 4,
COMMISSION 2015 (‘‘Sutherland Letter’’); Michael J. Hogan, 9 See Exchange Act Release No. 77103 (Feb. 10,

[Release No. 34–77550; File No. SR–FINRA– President and Chief Executive Officer, FOLIOfn 2016), 81 FR 8109 (Feb. 17, 2016) (Notice of
Investments, Inc., dated September 4, 2015 Designation of a Longer Period for Commission
2015–029]
(‘‘FOLIOfn Letter’’); Joseph C. Peiffer, President, Action on Proceedings to Determine Whether to
Public Investors Arbitration Bar Association Approve or Disapprove a Proposed Rule Change to
Self-Regulatory Organizations; (‘‘PIABA’’), dated September 3, 2015 (‘‘PIABA Adopt FINRA Rule 3210 (Accounts at Other Broker-
Financial Industry Regulatory Letter’’); and Kevin Zambrowicz, Associate General Dealers and Financial Institutions), as Modified by
Authority, Inc.; Order Approving Counsel & Managing Director, and Stephen Vogt, Partial Amendment No. 1, in the Consolidated
Assistant Vice President & Assistant General FINRA Rulebook).
Proposed Rule Change To Adopt Counsel, Securities Industry and Financial Markets 10 See Letter from Patrice Gliniecki, Senior Vice
FINRA Rule 3210 (Accounts at Other Association (‘‘SIFMA’’), dated September 3, 2015 President and Deputy General Counsel, FINRA, to
Broker-Dealers and Financial (‘‘SIFMA Letter’’). Comment letters are available at the Commission, dated March 2, 2016 (‘‘FINRA’s
Institutions), as Modified by Partial www.sec.gov. The Commission discussed these Second Letter’’). FINRA’s Second Letter and the text
comments in the Order Instituting Proceedings. See of Partial Amendment No. 2 are available on
Amendment No. 1 and Partial infra note 7.
Amendment No. 2, in the Consolidated FINRA’s Web site at http://www.finra.org, at the
5 See Letter from Patrice Gliniecki, Senior Vice
principal office of FINRA, and at the Commission’s
FINRA Rulebook President and Deputy General Counsel, FINRA, to Public Reference Room.
the Commission, dated November 10, 2015 11 The text of the proposed rule changes is
April 7, 2016 (‘‘FINRA Response Letter’’). The FINRA Response
available at the principal office of FINRA, on
Letter and the text of Partial Amendment No. 1 are
I. Introduction FINRA’s Web site at http://www.finra.org, and at
available on FINRA’s Web site at http://
the Commission’s Public Reference Room. In
www.finra.org, at the principal office of FINRA, at
On July 31, 2015, Financial Industry the Commission’s Web site at http://www.sec.gov/ addition, you may also find a more detailed
Regulatory Authority, Inc. (‘‘FINRA’’) rules/sro/finra/2015/34-75655.pdf, and at the description of the original proposed rule change, as
filed with the Securities and Exchange Commission’s Public Reference Room. amended by Amendment No. 1, in the Notice, and
Order Instituting Proceedings.
Commission (‘‘Commission’’), pursuant 6 15 U.S.C. 78s(b)(2)(B).
12 The proposed rule change, as described in this
asabaliauskas on DSK3SPTVN1PROD with NOTICES

7 See Exchange Act Release No. 76430 (Nov. 12,
to section 19(b)(1) of the Securities Item II, is excerpted, in part, from the Notice, which
2015), 80 FR 72118 (Nov. 18, 2015) (Order
Exchange Act of 1934 (‘‘Exchange Instituting Proceedings To Determine Whether To was substantially prepared by FINRA. See Notice.
Act’’) 1 and Rule 19b–4 thereunder,2 a Approve or Disapprove Proposed Rule Change to
13 The current FINRA rulebook consists of: (1)

proposed rule change to adopt a new, Adopt FINRA Rule 3210 (Accounts at Other Broker- FINRA Rules; (2) NASD Rules; and (3) rules
Dealers and Financial Institutions), as Modified by incorporated from NYSE (‘‘Incorporated NYSE
consolidated rule addressing accounts Rules’’). See id.
Partial Amendment No. 1) (‘‘Order Instituting
Proceedings’’)). The comment period closed on 14 For convenience, the Incorporated NYSE Rules
17 17 CFR 200.30–3(a)(12). December 9, 2015. are referred to as the ‘‘NYSE Rules.’’
1 15 U.S.C. 78s(b)(1). 8 See Letter from Laura Crosby-Brown, dated 15 See Exchange Act Release No. 4924 (Aug. 21,
2 17 CFR 240.19b–4. November 13, 2015 (‘‘Crosby-Brown Letter’’). 1953).

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Federal Register / Vol. 81, No. 71 / Wednesday, April 13, 2016 / Notices 21925

member firms and associated persons, a broker-dealer that is registered broker-dealer, investment adviser, bank,
including: pursuant to Exchange Act section or other financial institution,17 and (2)
• Obligations of Member Firms: 15(b)(11) (a notice-registered broker- have a financial interest in, or
NASD Rule 3050(a) requires that a dealer), a domestic or foreign discretionary authority over, such
member (called an ‘‘executing member’’) investment adviser, bank, or other accounts or transactions must obtain the
that knowingly executes a transaction financial institution (i.e., firms that are employer firm’s prior written consent.
for the purchase or sale of a security for not FINRA members), then he or she The rule also requires that persons
the account of a person associated with must: (i) Notify his or her employer having accounts or effecting
another member (called an ‘‘employer member in writing, prior to the transactions as covered by the rule must
member’’), or for any account over execution of any initial transactions, of arrange for duplicate confirmations and
which the associated person has the intention to open the account or statements (or their equivalents) to be
discretionary authority, must use place the order; and (ii) upon written sent to the employer firm. The rule
reasonable diligence to determine that request by the employer member, further requires that all such accounts
the execution of the transaction will not request in writing and assure that the and transactions must periodically be
adversely affect the interests of the notice-registered broker-dealer, reviewed by the employer member.
employer member. NASD Rule 3050(b) investment adviser, bank, or other • NYSE Rule 407.12 is similar to
requires that, when an executing financial institution provides the NASD Rule 3050(f), except that Rule
member knows that a person associated employer member with duplicate copies 407.12 excepts the specified
with an employer member has or will of confirmations, statements, or other transactions and accounts (i.e.,
have a financial interest in, or information concerning the account or transactions in unit investment trusts
discretionary authority over, any order. NASD Rule 3050(d) also provides and variable contracts or redeemable
existing or proposed account carried by that if an account subject to Rule securities of companies registered under
the executing member, the executing 3050(d) was established prior to the the Investment Company Act, or to
member must: person’s association with the member, accounts which are limited to
(1) Notify the employer member in the person must comply with the rule transactions in such securities, or to
writing, prior to the execution of a promptly after becoming associated. monthly investment plan type accounts)
transaction for the account, of the In addition, NASD Rule 3050(f) only from the obligation to send
executing member’s intention to open or provides that the requirements of Rule duplicate confirmations and statements
maintain that account; 3050 do not apply to transactions in unless requested by the employer.
(2) upon written request by the unit investment trusts and variable In addition, NYSE Rule 407A
employer member, transmit duplicate contracts or redeemable securities of (Disclosure of All Member Accounts)
copies of confirmations, statements, or companies registered under the requires members to promptly report to
other information with respect to the Investment Company Act of 1940 the NYSE any securities account
account; and (‘‘Investment Company Act’’), or to (including accounts at a member or non-
(3) notify the person associated with accounts which are limited to member broker-dealer, investment
the employer member of the executing transactions in such securities. adviser, bank or other financial
member’s intention to provide the institution), in which the member has a
notice and information required by (1) B. Current NYSE Rules 407 and 407A financial interest or the power to make
and (2), above. The purpose of NYSE Rule 407 is investment decisions. NYSE Rule 407A
• Obligations of Associated Persons: similar to the purpose of FINRA Rule also requires a member having such an
Associated persons who: (1) Open 3050—to provide member firms account to notify the financial
securities accounts or place securities information about transactions effected institution that carries or services the
orders through (a) a member firm other by their associated persons in accounts account that it is a member of the NYSE.
than their employer, or (b) other established outside their firm. In addition, the rule requires that
financial institution that is not a FINRA According to FINRA, the NYSE and members report to the NYSE when any
member, and (2) have a financial NASD rules are similar with some such securities account is closed.
interest in, or discretionary authority variations, including: FINRA states that ‘‘[t]hese reporting
over, such accounts or orders 16 must • NYSE Rule 407(a) is similar to requirements were designed to provide
comply with the following: NASD Rule 3050(b), except that Rule the NYSE with current information
(1) NASD Rule 3050(c) requires that a 407(a) requires that an executing about where floor members carry
person associated with a member, prior member receive an employer member’s securities accounts.’’ 18
to opening an account or placing an prior written consent before: (1) NYSE Rule Interpretation 407/01
initial order for the purchase or sale of Opening a securities or commodities addresses the process for determining
securities with another member, must account, or (2) executing any transaction whether the account of a spouse of an
notify both the employer member and in which a member or employee associated person should be subject to
the executing member, in writing, of his associated with another member or NYSE Rule 407.
or her association with the other member organization is directly or NYSE Rule Interpretation 407/02
member. The rule also provides that if indirectly interested. The rule also provides that NYSE Rule 407(b) applies
the account was established prior to the requires that duplicate confirmations when an associated person is also a
person’s association with the employer and account statements be sent majority stockholder of a non-public
promptly to the employer. corporation that wishes to open a
asabaliauskas on DSK3SPTVN1PROD with NOTICES

member, the person must notify both
members in writing promptly after • NYSE Rule 407(b) is similar to discretionary margin account at another
becoming associated; and NASD Rules 3050(c) and (d), except that member.
(2) NASD Rule 3050(d) provides that Rule 407(b) generally requires that
if the associated person opens a associated persons who: (1) Establish or 17 NYSE Rule 407.13 states that, for purposes of

maintain a securities or commodities the rule, the term ‘‘other financial institution’’
securities account or places an order for includes, but is not limited to, insurance
the purchase or sale of securities with account, or enter into a securities companies, trust companies, credit unions, and
transaction at (a) another member firm, investment companies.
16 See NASD Rule 3050(e). or (b) a domestic or foreign non-member 18 See Notice.

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Document Created: 2016-04-13 03:10:54
Document Modified: 2016-04-13 03:10:54
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		81 FR 21924