FINRA Requests Comment on the Application of Certain Rules to Government Securities and to Other Debt Securities More Broadly
Request for Comment
Referenced Rules & Notices
Exchange Act Sections 3(a)(10), (12), (29) and (42)
FINRA Rules 0150, 2010, 2241, 2242, 2320, 4370, 5240, 5250, 5270, 5280, 5310, 5320, 6420 and 6710
NASD Rules 1021, 1022, 1031, 1032 and 1050
SEA Regulation NMS
SEC Regulation AC
Anti-Intimidation and Coordination
Customer Order Protection
Fixed Income Securities
Government Securities Initiative
Comment Period Expires: April 9, 2018
FINRA is requesting comment on the application of the following rules to government securities, including U.S. Treasury securities: FINRA Rules 2242 (Debt Research Analysts and Debt Research Reports);15240 (Anti-Intimidation/Coordination); 5250 (Payments for Market Making); 5270 (Front Running of Block Transactions); 5280 (Trading Ahead of Research Reports); 5320 (Prohibition Against Trading Ahead of Customer Orders); and NASD Rules 1032(f) (Securities Trader), 1032(i) (Limited Representative—Investment Banking) and 1050 (Registration of Research Analysts).2 In addition, FINRA is requesting comment on the application of FINRA Rule 5320 as well as NASD Rules 1032(f) and 1050 to all debt securities, in addition to government securities.
Questions regarding this Notice should be directed to:
FINRA encourages all interested parties to comment. Comments must be received by April 9, 2018.
Comments must be submitted through one of the following methods:
Jennifer Piorko Mitchell
Office of the Corporate Secretary
1735 K Street, NW
Washington, DC 20006-1506
To help FINRA process comments more efficiently, persons should use only one method to comment.
Important Note: All comments received in response to this Notice will be made available to the public on the FINRA website. In general, FINRA will post comments as they are received.3
Background and Discussion
A number of FINRA rules do not apply to government securities or other exempted securities.4 FINRA Rule 0150 (Application of Rules to Exempted Securities Except Municipal Securities) lists the FINRA rules5 that expressly apply to transactions in, and business activities relating to, exempted securities, including government securities6 (other than municipal securities7).
In August 2016, the SEC's Division of Trading and Markets, in consultation with the staff of the U.S. Department of the Treasury, requested that FINRA undertake a comprehensive review of its rulebook to identify existing FINRA rules that exclude or do not clearly apply to U.S. Treasury securities (or government securities more generally), and to assess the continuing validity for such exclusions.8 In response, FINRA undertook a review of its rulebook for this purpose.9
As a result of its review, FINRA identified several rules that apply to exempted securities, including government securities (other than municipal securities), but that are not currently listed in FINRA Rule 0150. These include rules that generally apply to the activities of all FINRA members, without regard to the type of products they sell, such as FINRA Rule 4370 (Business Continuity Plans and Emergency Contact Information).10
In assessing the application of its rules to government securities, FINRA identified several rules that would benefit from additional industry comment. Specifically, as discussed below, FINRA is requesting comment on the implications of expressly applying FINRA Rules 2242, 5240, 5250, 5270, 5280 and 5320 as well as NASD Rules 1032(f), 1032(i) and 1050 to government securities, including U.S. Treasury securities. FINRA is also requesting comment on the implications of applying FINRA Rule 5320 and NASD Rules 1032(f) and 1050 to other types of debt securities, in addition to government securities.
FINRA Rule 2242 (Debt Research Analysts and Debt Research Reports)
FINRA Rule 2242 governs conflicts of interest in connection with the publication of debt research reports and public appearances by debt research analysts. The rule defines "debt research report" to mean any written communication that includes an analysis of a debt security or issuer of a debt security and that provides information reasonably sufficient upon which to base an investment decision. The rule defines "debt security" to mean any security as defined in Section 3(a)(10) of the Exchange Act but excludes, among other securities, U.S. Treasury securities.
In general, FINRA Rule 2242 requires firms to implement policies and procedures to identify and manage research-related conflicts of interest. Among other things, the policies must restrict or, in some cases, prohibit investment banking and sales and trading and principal trading personnel from the supervision and compensation determination of debt research analysts and research budget determinations. The rule further prohibits promises of favorable research and analyst participation in solicitation of investment banking business and road shows. The rule also requires disclosure of investment banking relationships and other material conflicts of interest, such as personal and firm ownership of a subject company's securities and principal trading of those securities. In addition, the rule specifies the prohibited and permissible interactions between the debt research personnel and sales and trading and principal trading personnel.
In many ways, FINRA Rule 2242 mirrors FINRA Rule 2241 (Research Analysts and Research Reports), the equity research rule, with respect to debt research distributed to retail investors. However, unlike FINRA Rule 2241, the rule also exempts from many of its provisions and all of the specific disclosure requirements debt research that is distributed only to eligible institutional investors from which the firm has obtained consent to receive the less protected research.
In explaining the exclusion of U.S. Treasury securities from FINRA Rule 2242, FINRA stated that it was reticent to become involved with direct obligations of the United States.11 However, FINRA differentiated agency securities, which are subject to FINRA Rule 2242, noting that it already required reporting of transactions in those securities to the Trade Reporting and Compliance Engine (TRACE).12 That distinction has since disappeared as FINRA, with the encouragement of the U.S. Department of the Treasury, now requires reporting of trades in U.S. Treasury securities to TRACE. FINRA also notes that FINRA Rule 2242 currently applies to research reports on foreign sovereign securities since many of the conflicts that rule addresses are present with respect to research on those securities. Further, the SEC's Regulation AC does not exclude U.S. Treasury securities from its certification requirements.
FINRA Rule 5280 (Trading Ahead of Research Reports)
FINRA Rule 5280(a) states that no member firm shall establish, increase, decrease or liquidate an inventory position in a security or derivative of such security based on non-public advance knowledge of the content or timing of a research report in that security. FINRA Rule 5280(b) requires a member firm to establish, maintain and enforce policies and procedures reasonably designed to restrict or limit the information flow between research department personnel, or other persons with knowledge of the content or timing of a research report, and trading department personnel, so as to prevent trading department personnel from utilizing non-public advance knowledge of the issuance or content of a research report for the benefit of the firm or any other person.
The objective of this rule is to prevent an unfair trading advantage for a firm or select customers based on knowledge of non-public research department information that is intended for a broader audience of customers. The rule, therefore, aims to ensure that where a firm chooses to provide information from its research department to its customers that may result in a transaction, it must give those customers priority in acting on the information vis-à-vis the member firm's own trading or that of select customers.
As FINRA noted in the proposed rule change adopting FINRA Rule 5280 and in an FAQ published in March 2016,13 because of the differing objective of FINRA Rule 5280, the definition of research report in the rule is not only intended to apply to both debt and equity research reports, but also to be broader than the definitions of "research report" and "debt research report" in FINRA Rules 2241 and 2242, respectively. Instead, it captures any written information from the research department that a reasonable person would expect to result in a transaction based on that information. Thus, for example, whereas FINRA Rules 2241 and 2242 exclude research reports distributed to fewer than 15 persons, those communications would be covered by FINRA Rule 5280.
FINRA Rule 5240 (Anti-Intimidation/Coordination)
FINRA Rule 5240 generally prohibits member firms and their associated persons from coordinating prices (including quotations) and trades or trade reports with any other person, asking or directing a member firm to alter a price, and attempting, directly or indirectly, to improperly influence any other person. The rule's prohibition includes but is not limited to behavior such as attempts to influence a member firm or associated person to adjust or maintain a price or quotation or other conduct that retaliates against or discourages the activities of another market maker or market participant.
The rule is designed to prevent behavior that could impair the fair and orderly functioning of the market by prohibiting specific conduct that is inconsistent with just and equitable principles of trade.14 FINRA's policy concerning unlawful coordination and retribution or retaliatory conduct was originally codified by FINRA (then NASD) in 1997 as NASD IM-2110-5 (Anti-Intimidation/Coordination).15 NASD noted at that time that it believed the conduct covered by the rule was already prohibited by then-NASD Rule 2110 (now FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade)), which requires member firms to observe high standards of commercial honor and just and equitable principles of trade. However, NASD adopted the specific prohibitions of IM-2110-5 as part of an undertaking that NASD agreed to in response to a 1996 SEC report on the activities of certain Nasdaq market makers that impeded price competition in the Nasdaq market.16 FINRA then adopted the language of IM-2110-5 without material change in FINRA Rule 5240 in 2009 as part of FINRA's effort to develop its consolidated rulebook.17
The rule identifies seven types of business activity by a firm that would not be prohibited, provided such activity is otherwise in compliance with all applicable law: (1) unilaterally setting its own bid or ask in a security at a bona fide price in a bona fide quantity; (2) unilaterally setting its own dealer spread, quote increment or quantity of shares for its quotations; (3) communicating its own bid or ask or bona fide prices or quantities in which it is willing to buy or sell in order to negotiate for or agree to a purchase or sale; (4) communicating its own bid or ask or bona fide prices or quantities in which it is willing to buy or sell to a person to retain that person as an agent or subagent for the member firm or its customer, and to negotiate for or agree to the purchase or sale; (5) underwriting; (6) taking unilateral action or making unilateral decisions regarding which market maker it will trade with and the relevant terms as long as such action is not otherwise prohibited by the rule; and (7) delivering an order to another member firm for handling.
FINRA Rule 5250 (Payments for Market Making)18
FINRA Rule 5250 prohibits member firms and their associated persons from accepting any payment or other consideration, directly or indirectly, from an issuer (or an issuer's affiliate or promoter), for publishing a quotation,19 acting as a market maker or submitting an application in connection therewith. The rule contains exceptions that permit a firm to accept: (1) payments for bona fide services, including but not limited to investment banking services; (2) reimbursement of registration and listing fees; and (3) payments provided for under the effective rules of a national securities exchange.
The rule is designed to assure that member firms act in an independent capacity when publishing a quotation or making a market in an issuer's securities. FINRA's policy concerning payments for market making was originally set forth in Notice to Members 75-16 and later codified as NASD Rule 2460 (now FINRA Rule 5250) in 1997.20 Among other things, FINRA (then NASD) recognized that firms generally have considerable latitude and freedom to make or terminate market-making activities and was concerned that payments by an issuer to a market maker could influence a firm's decision to make a market. In particular, the existence of undisclosed, private arrangements between market makers and an issuer or its promoters may make it difficult for investors to ascertain the true market for the securities.21
FINRA Rule 5270 (Front Running of Block Transactions)
FINRA Rule 5270 prohibits trading ahead of customer block transactions. Specifically, the rule prohibits trading, while in possession of material, non-public market information concerning an imminent customer block transaction, in the same security that is the subject of the block transaction as well as any "related financial instrument."22 The reverse is also true: When the imminent block transaction involves a related financial instrument, the rule prevents trading in the underlying security. The rule applies to trading ahead orders for: (1) any account in which a member firm or a person associated with a firm has an interest; (2) any account with respect to which the member firm or associated person exercises investment discretion; or (3) accounts of customers or affiliates of the firm when the customer or affiliate has been provided with the material, non-public market information concerning the imminent block transaction by the firm or associated person. FINRA Rule 5270 provides that the trading prohibitions in the rule apply until the time the information concerning the block transaction has been made publicly available or has otherwise become stale or obsolete.
Although FINRA Rule 5270 applies to most debt securities, it does not currently apply to block transactions involving government securities, which include U.S. Treasury securities.23 However, in the rule filing to adopt FINRA Rule 5270, FINRA noted that it has long been FINRA's view that front running conduct of the type contemplated by FINRA Rule 5270 in a government security would be prohibited pursuant to FINRA Rule 2010 requiring that member firms observe high standards of commercial honor and just and equitable principles of trade.24 Thus, although general standards of just and equitable principles of trade prohibit firms from trading in front of a customer block order in government securities to benefit the firm, this type of trading activity is not currently subject to the more detailed and specific provisions in FINRA Rule 5270.
FINRA Rule 5270 includes five separate Supplementary Material provisions addressing different aspects of the rule.
FINRA Rule 5320 (Prohibition Against Trading Ahead of Customer Orders)
FINRA Rule 5320 generally addresses a firm's obligations with respect to handling customer orders in an equity security when also trading proprietarily in the same security. Specifically, the rule prohibits a member firm from trading for its own account in a security on the same side of the market at a price that would satisfy a customer order in the same security, unless it immediately thereafter executes the customer order up to the size and at the same or better price at which it traded for its own account.
If a member firm trades proprietarily at a price and size that would satisfy a pending customer order in an equity security, a firm would not violate the rule if it "cures" the trading ahead by immediately executing the customer order up to the size and at the same or better price at which it traded for its own account. FINRA has also provided guidance on the timeframe required to meet the "immediately" aspect of the cure obligation (i.e., within one minute of the execution of the proprietary transaction).
The rule also requires that a member firm have a written methodology in place governing the execution and priority of all pending orders that is consistent with the requirements of FINRA Rules 5310 (Best Execution and Interpositioning) and 5320, and a firm further must ensure that such methodology is consistently applied.
FINRA Rule 5320.01 (Large Orders and Institutional Account Exceptions) provides an exception for large-sized customer orders and customer orders from an institutional account, if the member firm has provided the customer clear and comprehensive disclosure at account opening and annually thereafter that it may trade proprietarily at prices that would satisfy the customer order and provides the customer a meaningful opportunity to opt in to the rule's protections. Under the exception, a "large order" in an equity security is an order of 10,000 shares or more (unless such orders are less than $100,000 in value).
FINRA Rule 5320.02 (No-Knowledge Exception) generally provides firms with an exception for proprietary trading activity that occurs in a separate trading unit where the firm utilizes information barriers that prevent that trading unit from obtaining knowledge of customer orders held at another trading unit. For NMS stocks, all proprietary trading units may be walled off pursuant to the exception, whereas, for OTC equity securities, only non-market making desks may be walled off. Firms relying on the no-knowledge exception are required to comply with FINRA's Order Audit Trail System (OATS) reporting rules by providing a unique identifier on order information where information barriers are in place at departments within the firm where orders are received or originated.
FINRA Rule 5320.03 (Riskless Principal Exception) generally provides that the prohibitions of the rule would not apply to a member firm's proprietary trade if such proprietary trade is for the purposes of facilitating the execution, on a riskless principal basis, of an order from a customer. Among other things, the exception is conditioned upon member firms submitting a contemporaneous regulatory report identifying the trade as "riskless principal." The firm also must have in place policies and procedures requiring, among other things, that the customer order was received prior to the offsetting principal transaction, that the offsetting principal transaction is at the same price as the customer order (exclusive of any markup or markdown, commission equivalent or other fee), and that the securities be allocated to a riskless principal or customer account in a consistent manner within 60 seconds of execution. Member firms also must have supervisory systems in place that produce records that enable the firm and FINRA to reconstruct accurately, readily, and in a time-sequenced manner all facilitated orders for which the firm relies on this exception.
FINRA Rule 5320.04 (ISO Exception) provides firms with an exception under certain circumstances for proprietary trading resulting from an intermarket sweep order (ISO) routed in compliance with Rule 600(b)(30)(ii) of SEC Regulation NMS where the customer order is received after the firm routed the ISO. ISO orders are specific to trading in NMS stocks and are not applicable to trading in debt securities.
FINRA Rule 5320.05 (Odd Lot and Bona Fide Error Transaction Exceptions) provides an exception for a firm's proprietary trade to (1) offset a customer order that is in an amount less than a normal unit of trading; or (2) correct a bona fide error.
FINRA Rule 5320.06 (Minimum Price Improvement Standards) prescribes the minimum amount of price improvement necessary for a member firm to execute an order on a proprietary basis when holding an unexecuted limit order in that same security without violating the rule's requirements. This provision is intended to prevent firms from "pennying" their customer order by trading ahead at a price in a very small increment better than the customer order. It also relies on best bid and offer (BBO) quotation information for calculation of the minimum amount of price improvement required for lower priced securities.
FINRA Rule 5320.07 (Order Handling Procedures) requires that: (1) a firm must make every effort to execute a marketable customer order that it receives fully and promptly; (2) a firm that is holding a marketable customer order that has not been immediately executed must make every effort to cross such order with any other order received at a price that is no less than the best bid and no greater than the best offer; and (3) in the event a firm is holding multiple orders on both sides of the market that have not been executed, the firm must make every effort to cross or otherwise execute such orders in a manner that is reasonable and consistent with the objectives of the rule and with the terms of the orders.
Finally, FINRA Rule 5320.08 (Trading Outside Normal Market Hours) provides that member firms generally may limit the life of a customer order to the period of normal market hours of 9:30 a.m. to 4:00 p.m. ET; however, if the customer and firm agree to the processing of the customer's order outside normal market hours, the protections of the rule shall apply to that customer's order(s) at all times the customer order is executable by the firm.
NASD Rule 1032(f) (Securities Trader)
Currently, associated persons engaged in trading are subject to different representative-level qualification and registration requirements depending on whether the trading activity involves an equity or a debt security. Specifically, associated persons engaged in equity trading are subject to the qualification and registration requirements of NASD Rule 1032(f), whereas associated persons engaged in debt trading are subject to the qualification and registration requirements of NASD Rules 1032(a) (General Securities Representative), 1032(e) (Limited Representative—Corporate Securities) or 1032(g) (Limited Representative—Government Securities), as applicable.
By way of background, in 1995, FINRA (then NASD) became concerned about the escalating number of rule violations by associated persons trading in the equity securities markets. Subsequently, in 1998, NASD adopted NASD Rule 1032(f) with the view that better training and qualification of individuals engaged in equity trading was necessary. Thus, the rule has historically applied to equity or equity-like securities, but not debt securities in general.
Pursuant to NASD Rule 1032(f), each associated person of a member firm who is included within the definition of "representative" in NASD Rule 1031 (Registration Requirements) is required to register as a Securities Trader if, with respect to transactions in equity (including equity options), preferred or convertible debt securities28 effected otherwise than on a securities exchange, such person is engaged in proprietary trading, the execution of transactions on an agency basis or the direct supervision of such activities.29 The rule provides an exception from the registration requirement for any associated person whose trading activities are conducted principally on behalf of an investment company that is registered with the SEC pursuant to the Investment Company Act of 1940 and that controls, is controlled by, or is under common control with the member firm. Individuals registering as Securities Traders must pass the Securities Trader qualification examination (Series 57).
Unlike associated persons engaged in equity trading, associated persons engaged in debt trading are not required to pass a specific qualification examination or to register as traders. Rather, associated persons who are included within the definition of "representative" in NASD Rule 1031 and who are trading government securities are required to register as General Securities Representatives or Government Securities Representatives and pass the General Securities Representative qualification examination (Series 7) or the Government Securities Representative qualification examination (Series 72), respectively.30 In addition, associated persons who meet the definition of "representative" and who are trading other types of debt, such as corporate debt, are required to register as General Securities Representatives or Corporate Securities Representatives and pass the Series 7 or the Corporate Securities Representative qualification examination (Series 62), respectively.31
The principal-level qualification and registration requirements for associated persons supervising trading also vary depending on whether the trading activity involves an equity or a debt security. Paragraph (a)(6) of NASD Rule 1022 (Categories of Principal Registration) currently requires that each associated person who is included within the definition of "principal" in NASD Rule 1021 (Registration Requirements) with supervisory responsibility over the securities trading activities described in NASD Rule 1032(f) register as a Securities Trader Principal.32 To qualify for registration as a Securities Trader Principal, an individual must be registered as a Securities Trader and pass the General Securities Principal qualification examination (Series 24). However, associated persons functioning as principals responsible for supervising debt trading currently are required to register as General Securities Principals and pass the Series 24 examination,33 provided that if their activities are limited solely to the supervision of government securities trading, they may instead register as Government Securities Principals.34
The debt market constitutes a significant portion of the overall securities market and includes numerous complex product types with unique attributes. Moreover, debt securities are subject to specific laws, rules and regulations, which may require specialized knowledge. For instance, member firms engaged in over-the-counter secondary market transactions in eligible fixed income securities are required to report such transactions to TRACE, which has distinct reporting requirements and conventions.
NASD Rule 1032(i) (Limited Representative—Investment Banking)
NASD Rule 1032(i) requires each person associated with a member firm who is engaged in specified investment banking activities to register as an Investment Banking Representative and to pass the Series 79 qualification examination. The requirement is triggered if the individual's activities involve:
The rule provides exceptions to the registration requirement for persons whose activities involve only retail or institutional sales and trading activities, advising on or facilitating placement of direct participation program securities (as those activities are defined in the registration requirements for Direct Participation Programs Representatives), or effecting private securities offerings (as those activities are defined in the registration requirements for Private Securities Offering Representatives). There is currently no exception for investment banking activities related to government securities.
The purpose of this registration provision was to create a core competency examination requirement more specifically tailored to the activities of investment bankers than the more generalized Series 7 qualification examination previously required of most investment bankers. To that end, the triggers for this registration requirement encompass a broad range of investment banking activities, including advising on or facilitating all types of debt and equity offerings, other than the narrow exceptions noted above.35
NASD Rule 1050 (Registration of Research Analysts)
NASD Rule 1050 requires all persons associated with a member firm who are to function as research analysts to register with FINRA as such and pass the Series 86 (Analysis) and Series 87 (Regulatory Administration) qualification examinations.36 For the purposes of the rule, "research analyst" means an associated person whose primary job function is to provide investment research and who is primarily responsible for the preparation of the substance of a research report or whose name appears on a research report. Registration as a General Securities Representative is currently a prerequisite to taking the research analyst qualification examinations.
The rule became effective in 2004, when only an equity research conflict of interest rule existed. In July 2016, FINRA Rule 2242, a dedicated debt research conflict of interest rule became effective. However, as FINRA noted in proposing FINRA Rule 2242 and in an FAQ after its approval,37 NASD Rule 1050 was not amended and applies only to equity research analysts. FINRA also noted that it was considering whether a similar requirement should apply to debt research analysts.38
Other Exempted Securities
The rules listed in FINRA Rule 0150 are applicable to transactions in, and business activities relating to, other exempted securities39 (excluding municipal securities), depending on the context of a particular rule. For example, FINRA Rule 2320(g) (Member Compensation), which is listed in FINRA Rule 0150, is applicable to group variable contracts that are exempted securities, but not to government securities.
Potential Economic Impact of the Proposals
The rules discussed above are intended to create benefits for member firms and the investing public. Specifically, these rules, among other things, mitigate the research-related conflicts of interest, prevent an unfair trading advantage for a firm or select customers based on knowledge of non-public research department information, maintain fair and orderly functioning of the markets, assure that member firms act in an independent capacity when publishing a quotation or making a market, and set the qualification and registration requirements for individuals engaged in trading or investment banking activities. However, FINRA also acknowledges that these rules may currently impose compliance costs on member firms, in the form of staffing costs, costs associated with establishing and implementing policies and procedures, fees associated with qualification examinations and registration as well as supervision and monitoring costs. In some instances, compliance with these rules may limit a member firm's ability to transact in a security at a given time and there may be an opportunity cost associated with the restrictions.
The anticipated costs and benefits associated with expressly applying these rules to government securities and, in some cases, to debt securities more broadly, may be substantially the same or may differ in important ways from the securities already covered by the rules. FINRA invites comment generally and in connection with the questions above on any economic impacts that might be associated with the application of the rules discussed in this Notice to government securities, including U.S. Treasury securities, and other debt securities more broadly. FINRA understands that the application of these rules to government securities and other debt securities may potentially have both direct and indirect impacts on member firms, the government securities market, customers and the investing public. FINRA requests that commenters provide a discussion of the types (direct vs. indirect) and sources (e.g., compliance, staffing or technology) of potential costs and benefits wherever possible.
Request for Comments
FINRA seeks comments on the implications of expressly applying the rules discussed in this Notice to government securities, including U.S. Treasury securities, and, in some cases, to debt securities more broadly. In responding to the questions above or in providing general comments, FINRA requests that commenters provide empirical data or other factual support for their comments wherever possible.
1. FINRA Rule 2242 currently applies to debt securities, including most government securities. However, the rule expressly excludes U.S. Treasury securities.
2. The SEC approved a proposed rule change to adopt NASD Rules 1032(f), 1032(i) and 1050 as FINRA Rules 1220(b)(4) (Securities Trader), 1220(b)(5) (Investment Banking Representative) and 1220(b)(6) (Research Analyst), respectively, in the consolidated FINRA rulebook. The consolidated FINRA registration rules have been approved by the SEC and will become effective October 1, 2018. See Securities Exchange Act Release No. 81098 (July 7, 2017), 82 FR 32419 (July 13, 2017) (Order Approving File No. SR-FINRA-2017-007); Regulatory Notice 17-30 (October 2017) (SEC Approves Consolidated FINRA Registration Rules, Restructured Representative-Level Qualification Examinations and Changes to Continuing Education Requirements).
3. Persons submitting comments are cautioned that FINRA does not redact or edit personal identifying information, such as names or email addresses, from comment submissions. Persons should submit only information that they wish to make publicly available. See Notice to Members 03-73 (November 2003) (Online Availability of Comments) for more information.
4. The term "exempted securities" is defined in Section 3(a)(12) of the Securities Exchange Act of 1934 (SEA or Exchange Act).
5. Some of these rules have been expressly approved by the Securities and Exchange Commission (SEC). See, e.g., Securities Exchange Act Release No. 37588 (August 20,1996), 61 FR 44100 (August 27, 1996) (Order Approving File No. SR-NASD-95-39). Others were filed with the SEC for immediate effectiveness. See, e.g., Securities Exchange Act Release No. 61747 (March 19, 2010), 75 FR 15470 (March 29, 2010) (Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-2010-010).
6. The term "government securities" is defined in Section 3(a)(42) of the Exchange Act.
7. The term "municipal securities" is defined in Section 3(a)(29) of the Exchange Act.
8.See letter from Stephen Luparello, Director, Division of Trading and Markets, SEC, to Robert W. Cook, President and Chief Executive Officer, FINRA, dated August 19, 2016, available at https://www.sec.gov/divisions/marketreg/letter-to-finra-regulation-of-us-treasury-securities.pdf.
9.See letter from Robert W. Cook, President and Chief Executive Officer, FINRA, to Stephen Luparello, Director, Division of Trading and Markets, SEC, dated October 17, 2016, available at https://www.sec.gov/divisions/marketreg/letter-from-finra-regulation-of-us-treasury-securities.pdf.
10. FINRA is considering filing a proposed rule change with the SEC to codify these rules under FINRA Rule 0150(c).
11.See Securities Exchange Act Release No. 73623 (November 18, 2014) 79 FR 69905, 69922 (November 24, 2014) (Notice of Filing of File No. SR-FINRA-2014-048).
13.See Securities Exchange Act Release No. 59254 (January 15, 2009) 74 FR 4271, 4272 (January 23, 2009) (Order Approving File No. SR-FINRA-2008-054) and Research Rules Frequently Asked Questions (FAQ), Applicability of Rule 5280 (Trading Ahead of Research Reports), 01, posted March 4, 2016, available at http://www.finra.org/industry/faq-research-rules-frequently-asked-questions-faq#5280.
14.See Securities Exchange Act Release No. 59119 (February 2, 2009) 74 FR 6335 (February 6, 2009) (Order Approving File No. SR-FINRA-2008-061).
15.See Securities Exchange Act Release No. 38845 (July 17,1997) 62 FR 39564 (July 23,1997) (Order Approving File No. SR-NASD-97-37).
16.See Order Approving File No. SR-FINRA-2008-061, supra note 14.
18. In November 2017, FINRA published Regulatory Notice 17-41 announcing its retrospective rule review to assess the effectiveness and efficiency of FINRA Rule 5250 and soliciting comment on the rule. Upon completion of its assessment, FINRA staff will consider appropriate next steps, which may include some or all of the foilowing: modifications to the rule, updated or additional guidance, administrative changes ortechnology improvements, or additional research or information gathering.
19. "Quotation" is defined under FINRA Rule 5250 as (1) any bid or offer at a specified price with respect to a security, (2) any indication of interest by a member firm in receiving bids or offers from others for a security, or (3) an indication by a firm that it wishes to advertise its general interest in buying or selling a particular security.
20.See Notice to Members 75-16 (February 20,1975) and Securities Exchange Act Release No. 38812 (July 3, 1997), 62 FR 37105 (July 10, 1997) (Order Approving File No. SR-NASD-97-29).
21. As stated in the SEC's approval order, "If payments... were permitted, investors would not be able to ascertain which quotations in the marketplace are based on actual interest and which quotations are supported by issuers or promoters. This structure would harm investor confidence in the overall integrity of the marketplace." Securities Exchange Act Release No. 38812, 62 FR at 37107.
22. A "related financial instrument" is defined as an option, derivative, or other financial instrument that overlies a security that is the subject of an imminent block transaction if the value of the underlying security is materially related to, or otherwise acts as a substitute for, such security, as well as any contract that is the functional economic equivalent of a position in such security.
23.See Regulatory Notice 12-52, n. 9 (December 2012).
24.See Securities Exchange Act Release No. 67774 (September 4, 2012), 77 FR 55519, 55520 n.6 (September 10, 2012); see also Regulatory Notice 12-52, n. 9 and Notice to Members 96-66 (October 1996).
25. In a "workup," the execution of a marketable order opens a short time window where participants can transact additional volume at the same price. For a detailed description of the workup process, please see http://libertystreeteconomics.newyorkfed.org/2015/08/the-evolution-of-workups-in-the-us-treasury-securities-market.html.
26. FINRA would also clarify the meaning of "equity security" under the rule. Specifically, FINRA would replace the term "equity security" with the terms "NMS stock," as defined in Rule 600 of SEC Regulation NMS, and "OTC equity security," as defined in FINRA Rule 6420, which would make clear that the rule does not apply to options.
27. The unique identifier requirement would not apply because debt securities would not be subject to the OATS reporting rules.
28. FINRA included convertible debt securities under the rule because, under specific conditions, convertible debt securities trade similarly to equity securities.
29. The rule also requires that associated persons primarily responsible for the design, development or significant modification of algorithmic trading strategies (or responsible for the day-to-day supervision or direction of such activities) register as Securities Traders.
30.See NASD Rules 1032(a) and (g).
31.See NASD Rules 1032(a) and (e).
32. The corresponding consolidated registration rule is FINRA Rule 1220(a)(7) (Securities Trader Principal). See supra note 2.
33.See NASD Rule 1022(a)(1).
34. Individuals registering as Government Securities Principals are not subject to a principal qualification examination. However, they are required to satisfy the General Securities Representative or Government Securities Representative prerequisite registration. See NASD Rule 1022(h) (Limited Principal–Government Securities).
35. In addition, NASD Rule 1022(a)(1)(B) currently requires that a General Securities Principal with responsibility over the investment banking activities specified in NASD Rule 1032(i) also satisfy the Investment Banking Representative registration requirement. The corresponding consolidated registration rule is FINRA Rule 1220(a)(5) (Investment Banking Principal). See supra note 2.
36. Associated persons supervising the conduct of equity research analysts are also subject to specific principal-level qualification and registration requirements. Specifically, NASD Rule 1022(a)(5) requires persons who supervise the conduct of "research analysts" under NASD Rule 1050 to register as Research Principals. The corresponding consolidated registration rule is FINRA Rule 1220(a)(6) (Research Principal). See supra note 2. Currently, a Research Principal is required to be registered as a General Securities Principal and pass either the Series 87 or the Supervisory Analyst qualification examination (Series 16).
37.See Securities Exchange Act Release No. 73623 (November 18, 2014) 79 FR 69905 (November 24, 2014) (Notice of Filing of File No. SR-FINRA-2014-048) and Research Rules Frequently Asked Questions (FAQ), Registration Requirements, 01, posted March 4, 2016, available at http://www.finra.org/industry/faq-research-rules-frequently-asked-questions-faq#registration.
38.See Research Rules Frequently Asked Questions (FAQ), Registration Requirements, 01, posted March 4, 2016, available at http://www.finra.org/industry/faq-research-rules-frequently-asked-questions-faq#registration.
39. Exempted securities, other than government securities, include, for example, interests or participations in specified qualified plans and insurance company contracts, interests or participations in specified church plans, pooled income funds, and various collective investment vehicles that are excluded from the definition of "investment company" under Section 3(c) of the Investment Company Act, and such other securities as determined by SEC rule.
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