On December 15, 2008, the first rules adopted by the Financial Industry Regulatory Authority ("FINRA") as FINRA rules--as opposed to NASD or New York Stock Exchange ("NYSE") rules applicable to FINRA members--will take effect. In anticipation of that date, we review here the current status of FINRA's rule consolidation project.

Separately, our review summarizes outstanding rule proposals that FINRA or the Securities and Exchange Commission ("SEC" or "Commission") has published for comment. Two such proposals--one regarding circulation of rumors¹ and another regarding requirements for reporting potential rule violations²--have open FINRA comment periods that will expire on December 18 and December 29, respectively. Notably, whereas much of the proposed and adopted FINRA rule text is based upon the NASD rules, these two most recent proposals incorporate significant aspects of the relevant NYSE rules. The proposed rule requiring members to report potential rule violations is particularly significant and likely to generate discussion, as it incorporates the NYSE requirement that members report internal findings of rule violations, rather than only external findings as in the existing NASD rule. The proposal also resolves various other differences between the existing NASD and NYSE rules (e.g., a 30-day reporting deadline, as in existing NYSE Rule 351, rather than a 10-day deadline as in existing NASD Rule 3070), and proposed supplementary material would clarify certain aspects of the rule's application.

The FINRA Rule Consolidation Process

FINRA's existing rulebook is called the Transitional Rulebook and consists of the NASD Rules, which generally apply to all FINRA members, and certain rules incorporated from the NYSE Rulebook ("Incorporated NYSE Rules"), which are applicable to FINRA members that also are NYSE members ("Dual Members"). The Consolidated FINRA Rulebook (or "Consolidated Rulebook") eventually will replace the Transitional Rulebook in its entirety.³

Last month, FINRA published an Information Notice announcing that FINRA will issue bimonthly Regulatory Notices, each announcing the effective dates--generally 60 days after publication of the notice--for new FINRA rules approved in the two months preceding the month in which the notice is issued.⁴ On October 16, FINRA issued Regulatory Notice 08-57, in which it announced December 15, 2008, as the effective date for rules approved in August and September for the Consolidated Rulebook. The Notice also announced the availability of Rule Conversion Charts that indicate the correspondence between FINRA rules and the NASD and/or Incorporated NYSE rules they replace. The correspondence may not be exact, and the Rule Conversion Charts are meant as a reference only and not as a substitute for review of the new rules.⁵ The Conversion Charts may be useful where, for example, rules in the Transitional Rulebook cross-reference NASD or Incorporated NYSE rules that have been transferred to the Consolidated Rulebook. In such instances, the cross-references should be treated as referring to the corresponding FINRA rules in the Consolidated Rulebook.⁶

Changes to Transitional Rulebook Effective November 11

FINRA CEO Mary Schapiro has stated that the completion of the Consolidated Rulebook "will take some time," and changes to the Transitional Rulebook will occur over the course of the consolidation process.⁷ Most recently, November 11, 2008 was the effective date for certain rule changes to the Transitional Rulebook intended to harmonize certain rules and to remove conflicting or unnecessary regulatory burdens on Dual Members.⁸

The November 11 amendments ease or eliminate certain aspects of the Incorporated NYSE Rules, make certain organizational changes, and incorporate standards from the NASD Rules:

• A new "principal executive" category has replaced the "allied member" designation in the NYSE rules;
• The three-year experience requirement for supervisors in NYSE Rule 342.13(a) has been removed;
• Prescribed training periods and employee registration and approval requirements in NYSE Rule 345 have been eliminated;
• NYSE Rule 346(c), requiring notice of control relationships, has been deleted;
• Different burdens have replaced the requirement in NYSE Rule 346(e) and Supplementary Material .10 for SRO approval for supervisors to use time during business hours for entities other than the member organization;
• Oral complaints have been excluded from the definition of a reportable customer complaint in NYSE Rule 351;
• NYSE Rule 352's restrictions on sharing in customer accounts have been eased with respect to joint accounts with immediate family members;
• Requirements relating to the self-regulatory organization operational, clearing and settlement rules (Rules 140, 283, and 285-290) have been relocated to NYSE Rule 282, and certain harmonizing amendments have been made;
• Requirements for private securities transactions have been moved from NYSE Rule 407 to NYSE Rule 346, and certain definitions from corresponding NASD rules have been adopted; and
• NYSE Rule 408(a), regarding written authorization to exercise discretionary power in customer accounts, has been conformed to NASD Rule 3110(c)(3).

FINRA also has deleted a number of Incorporated NYSE rules it determined were obsolete or duplicative of NASD rules.⁹

Consolidated Rules Effective December 15

As announced in FINRA Regulatory Notice 08-57, the first FINRA rules in the Consolidated Rulebook will take effect on December 15, 2008. Generally, the new FINRA rules adopt text from the corresponding NASD rules, with minor changes, and a number of corresponding NYSE rules will be deleted as duplicative of or subsumed by the standards in the new rules. In addition, several more specific or burdensome aspects of the relevant NYSE rules will be eliminated, as noted below.

The new FINRA rules address:

• General standards;
• Ethical conduct;
• Transactions involving FINRA employees (NYSE Rule 407(a) and .10 deleted);
• Annual certification of compliance and supervisory processes (NYSE Rule 342.30 and Interpretations 311(b)(5)/04 & /05 and 342.30(d)/01 through (e)/01 deleted);
• Influencing or rewarding employees of others (NYSE Rule 350 and its supplementary material and interpretations deleted);
• Short interest reporting (requirements of both NASD and NYSE rules incorporated);
• The corporate financing rule;
• Restrictions on the purchase and sale of initial public offerings;
• Fairness opinions;
• Notification requirements for offering participants;
• Trading halts;
• Withdrawal of quotations due to Regulation M (requirements of both NASD and NYSE rules incorporated);
• Regulatory requirements and fees for quoting, trading, clearing and comparing over-the-counter transactions;
• The Code of Procedure; and
• Dispute resolution.

In addition, NASD IM-1013-1 will be amended to make all Dual Members, including those that have become FINRA members through the waive-in process, subject to applicable rules in the Consolidated Rulebook.

Finally, the following Incorporated NYSE rules will be repealed: 405A (fee-based brokerage), 440F (certain short sale reports), 440G (certain stock/warrant transaction reports), and 477 (regulatory jurisdiction). Other NYSE rules involving warrants, options, and futures also are expected to be repealed in the near future, since the Commission recently approved new FINRA rules involving such instruments.¹⁰

Outstanding Rule Proposals

In addition, a number of proposals for new FINRA rules (some more controversial than others) are pending¹¹, including:

• Financial responsibility (would address and incorporate some provisions in NYSE Rules 325, 326, and 328).¹²
• Supervision and supervisory controls (notable deletions would include NYSE Rule 343).¹³
• Books and records requirements (would delete NYSE Rule 440, but not 440.10, 440.2, or Interpretation 440.20/01).¹⁴
• Research analyst conflict of interest rules (would delete provisions in NYSE Rules 344 and 472 and their respective Interpretations).¹⁵
• Trading ahead of research reports (would replace NASD IM-2110-4, but modify it to apply to all securities and to non-public advance knowledge of research reports, and require policies and procedure to prevent violations).¹⁶
• Circulation of rumors (would replace FINRA Rule 6140(e), which was adopted effective Dec. 15, 2008, incorporate a reporting requirement from Incorporated NYSE Rule 435(5), which would be deleted along with its Interpretation, and make the new standards applicable to all securities). The FINRA comment period for this proposal expires December 18, 2008.¹⁷
• Reporting requirements for rule violations and other events (would replace NASD Rule 3070 and NYSE Rule 351, incorporating aspects of both the existing rules to cover both internal and external findings of violations, resolve other discrepancies between the two rules, and provide clarification regarding certain aspects of the rule's application). The FINRA comment period for this proposal expires December 29, 2008.¹⁸

Until the Consolidated FINRA Rulebook is complete and replaces the NASD and Incorporated NYSE Rules, Dual Members must continue to comply with the Incorporated NYSE Rules, in addition to applicable NASD and FINRA rules.

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1 See FINRA Regulatory Notice 08-68 (Nov. 2008).

2 See FINRA Regulatory Notice 08-71 (Nov. 2008).

3 See FINRA Information Notice (Mar. 12, 2008) (describing the rulebook consolidation process).

4 See FINRA Information Notice (Oct. 6, 2008).

5 See id.

6 See Exchange Act Release No. 58,176 (July 16, 2008) (proposing SR-FINRA-2008-021).

7 Mary L. Schapiro, CEO, FINRA, Remarks, CCOutreach BD National Seminar (Mar. 7, 2008).

8 See FINRA Regulatory Notice 08-64 (Oct. 2008).

9 The deleted rules are NYSE Rules 311(h) (number of partners to be named in a member organization); 436 (interest on credit balances) and its interpretation; 404 (individual members not to carry accounts); 412 (customer account transfer contracts) and its interpretation; and 446 (business continuity and contingency plans).

10 See Exchange Act Release No. 58,932 (Nov. 12, 2008) (approving SR-FINRA-2008-032, which will adopt NASD rule language and delete NYSE Rules 414, 424, and 700 Series). We expect FINRA to announce the effective date in a December Regulatory Notice.

11 The proposals listed below have been published by either FINRA or the SEC for comment. In addition, FINRA has filed several rule proposals that the SEC has yet to publish for notice and comment. These include File Nos. 2008-055 (recommendations to customers in OTC securities), 2008-052 (interfering with the transfer of customer accounts in the context of employment disputes), 2008-045 (eligibility procedures for persons subject to certain disqualifications), and 2008-020 (requirements regarding member private offerings). Status information regarding rule filings is available at www.finra.org/. Some of the pending rule changes have received comment letters from the Securities Industry and Financial Markets Association. See www.sifma.org/comments/index.aspx.

12 See FINRA Regulatory Notice 08-23 (May 2008). The FINRA comment period for this proposal expired June 13, 2008. For a discussion of the proposal, see Towards a Consolidated Rulebook: FINRA's Proposals Achieve Harmonization, but Raise Questions, WilmerHale Securities Briefing Series, May 27, 2008.

13 See FINRA Regulatory Notice 08-24 (May 2008). The FINRA comment period for this proposal expired June 13, 2008. For a discussion of the proposal, see Towards a Consolidated Rulebook: FINRA's Proposals Achieve Harmonization, but Raise Questions, WilmerHale Securities Briefing Series, May 27, 2008.

14 See FINRA Regulatory Notice 08-25 (May 2008). The FINRA comment period for this proposal expired June 13, 2008. For a discussion of the proposal, see Towards a Consolidated Rulebook: FINRA's Proposals Achieve Harmonization, but Raise Questions, WilmerHale Securities Briefing Series, May 27, 2008

15 See FINRA Regulatory Notice 08-55 (Oct. 2008). The FINRA comment period for this proposal expired November 14, 2008.

16 See Exchange Act Release No. (Nov. 4, 2008) (proposing SR-FINRA-2008-054). The SEC comment period for this proposal expired December 4, 2008. Incorporated NYSE Rule Interpretation 401/01, which addresses similar conduct, already has been deleted, effective Dec. 15, 2008.

17 See FINRA Regulatory Notice 08-68 (Nov. 2008).

18 See FINRA Regulatory Notice 08-71 (Nov. 2008). FINRA continues to amend certain NASD and Incorporated NYSE rules as well. For example, one proposal currently pending would address the supervision of market letters. See Exchange Act Release No. 58,648 (Sept. 25, 2008) (proposing SR-FINRA-2008-044, which would amend NASD Rules 2210 and 2211 and Incorporated NYSE Rule 472 to harmonize their treatment of market letters and eliminate the requirement for supervisory approval of market letters sent to institutional investors).