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January 13, 2009

FINRA: No Rumor-Mongering

By Nina Mehta

Stamping out rumor-mongering has taken on greater urgency at the Financial Industry Regulatory Authority, which in November proposed a new rule to members to prevent the dissemination of rumors intended to manipulate stock prices.

"To the extent [a rumor] is unsubstantiated, you're giving credence to that, and you know it might not bear out, it's problematic," said William Jannace, managing director in the member regulation division of FINRA, at a Securities Operations Forum conference on global market structure in December.

FINRA's proposed Rule 2030 is based on FINRA Rule 6140(e) and NYSE rule 435(5), and extends the prohibition on creating and circulating rumors to cover all securities, and not just listed names. The comment period for Rule 2030 ended in mid-December, and like all new rules, an eventual rumor rule would have to be approved by the Securities and Exchange Commission.

However, the utility of a new FINRA rumor rule is unclear. "This will not make a big practical difference in terms of firms' susceptibility to enforcement actions," said Lanny Schwartz, a partner in the broker-dealer and market regulation practice at law firm Davis Polk & Wardwell. "If FINRA found that a firm was spreading rumors to manipulate the market, with or without the rule, they would have general authority to bring disciplinary proceedings against the firm."

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