[Federal Register Volume 75, Number 123 (Monday, June 28, 2010)]
[Notices]
[Pages 36756-36759]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-15549]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62341; File No. SR-FINRA-2010-032]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend
FINRA Rule 11892 (Clearly Erroneous Transactions in Exchange-Listed
Securities)
June 21, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 17, 2010, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 11892 (Clearly Erroneous
Transactions in Exchange-Listed Securities).
The text of the proposed rule change is 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.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA is proposing modifications to its Rule 11892, entitled
Clearly Erroneous Transactions in Exchange-Listed Securities (``the
Rule''). First, FINRA proposes replacing existing paragraph (b)(2) of
the Rule, entitled ``Alternative Reference Prices'' with a new
paragraph, entitled ``Multi-Stock Events Involving Twenty or More
Securities.'' Second, FINRA is replacing existing paragraph (b)(4) of
the Rule, entitled ``Numerical Guidelines Applicable to Volatile Market
Opens'' with a new paragraph, entitled ``Individual Stock Trading
Pauses.'' Third, FINRA is combining paragraphs (a)(1) and (a)(2) into
one paragraph to provide that paragraph (b) governs the review of all
transactions reported to a FINRA trade reporting system, whether or not
there are similarly situated transactions in the security on a national
securities exchange. Finally, FINRA proposes modifications to
paragraphs (b)(1) and (b)(3) of the Rule consistent with the proposed
changes to paragraphs (b)(2) and (b)(4). The provisions of this
proposed rule change shall be in effect during a pilot period set to
end on December 10, 2010. If the pilot is not extended or approved as
permanent by December 10, 2010, the prior version of this Rule shall be
in effect.
FINRA is proposing the rule changes described herein in
consultation with other self-regulatory organizations (``SROs'') and
Commission staff to provide for uniform treatment: (1) Of clearly
erroneous execution reviews in Multi-Stock Events involving twenty or
more securities; and (2) in the event transactions occur that result in
the issuance of an individual stock trading pause by the primary
listing market and subsequent transactions that occur before the
trading pause is in effect for transactions otherwise than on an
exchange. FINRA also has proposed additional changes to the Rule that
reduce the ability of FINRA to deviate from the objective standards set
forth in the Rule. The proposed changes are described in further detail
below.
Revised Paragraph (b)(2) Related to Multi-Stock Events Involving Twenty
or More Securities
FINRA proposes to eliminate the text of existing paragraph (b)(2),
which provides flexibility to FINRA to use different Numerical
Guidelines or Reference Prices in various ``Unusual Circumstances.''
FINRA proposes to replace the text of this paragraph with new language
that would apply to Multi-Stock Events involving twenty or more
securities whose executions occurred within a period of five minutes or
less. The revised paragraph would provide that during Multi-Stock
Events involving twenty or more securities the number of affected
transactions may be such that immediate finality is necessary to
maintain a fair and orderly market and to protect investors and the
public interest. Accordingly, as set forth in paragraph (a)(2), in such
circumstances, decisions made by FINRA in consultation with the markets
could not be appealed. Further, as proposed, in connection with reviews
of Multi-Stock Events involving twenty or more securities, FINRA may
use a Reference Price other than consolidated last sale in its review
of potentially clearly erroneous executions. With the exception of
those securities under review that are subject to an individual stock
trading pause as described in proposed paragraph (b)(4), and to ensure
consistent application across market centers when proposed paragraph
(b)(2) is invoked, FINRA will promptly coordinate with the other market
centers to determine the appropriate review period, which may be
greater than the period of five minutes or less that triggered
application of proposed paragraph (b)(2), as well as select one or more
specific points in time prior to the transactions in question and use
transaction prices at or immediately prior to the one or more specific
points in time selected as the Reference Price. FINRA will nullify as
clearly erroneous all transactions that are at prices equal to or
greater than 30% away from the Reference Price in each affected
security during the review period selected by FINRA and the markets
consistent with the proposed paragraph (b)(2).
Because FINRA and the market centers are adopting a different
threshold and standards to handle large-scale market events, which
would
[[Page 36757]]
include events occurring during times of high volatility at the
beginning of regular trading hours, FINRA proposes deletion of
paragraph (b)(4) (``Numerical Guidelines Applicable to Volatile Market
Opens'') of the existing rule. FINRA believes that this provision is no
longer necessary, and if maintained, could result in extremely high
Numerical Guidelines (up to 90%) in certain circumstances.
Revised Paragraph (b)(4) Related to Individual Stock Trading Pauses
Several SROs recently amended their rules so that they may, from
time to time, issue a trading pause for an individual security if the
price of such security moves 10% or more from a sale in a preceding
five-minute period. In this regard, the SEC recently approved a
proposed rule change by FINRA to halt trading in an individual stock
when the primary listing market for such stock issues a trading pause
in any security under its rules.\3\ As described above, FINRA is
proposing to eliminate existing paragraph (b)(4) (``Numerical
Guidelines Applicable to Volatile Market Opens''). FINRA proposes
adopting a provision, numbered as paragraph (b)(4) following such
elimination, which will provide for uniform treatment of clearly
erroneous execution reviews in the event transactions occur that result
in the issuance of an individual stock trading pause by the primary
listing market and subsequent transactions that occur before the
trading pause is in effect for transactions otherwise than on an
exchange. The proposed rule change is necessary to provide greater
certainty of the clearly erroneous Reference Price for transactions
that trigger a trading pause (the ``Trigger Trade'') and subsequent
transactions occurring between the time of the Trigger Trade and the
time the trading pause message is received by FINRA from the single
plan processor responsible for consolidation and dissemination of
information for the security and put into effect by FINRA for
transactions otherwise than on an exchange, especially under highly
volatile and active market conditions.
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\3\ See Securities Exchange Act Release No. 62251 (June 10,
2010), 75 FR 34183 (June 16, 2010) (Order Approving File No. SR-
FINRA-2010-025).
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FINRA proposes to use the price that triggered a trading pause in
an individual stock (the ``Trading Pause Trigger Price'') as the
Reference Price for clearly erroneous execution reviews of a Trigger
Trade and transactions that occur immediately after a Trigger Trade but
before a trading halt is in effect for transactions otherwise than on
an exchange. As proposed, the phrase ``Trading Pause Trigger Price''
shall mean the price that triggered a trading pause on a primary
listing market. The Trading Pause Trigger Price reflects a price
calculated by the primary listing market over a rolling five-minute
period and may differ from the execution price of a transaction that
triggered a trading pause. FINRA will rely on the primary listing
market that issued an individual stock trading pause to determine and
communicate the Trading Pause Trigger Price for such stock. FINRA
proposes to make clear in the text that the proposed standards in
paragraph (b)(4) apply regardless of whether the security at issue is
part of a Multi-Stock Event involving five or more securities as
described in proposed paragraphs (b)(1) and (b)(2).
As proposed, the Numerical Guidelines set forth in paragraph (b)(1)
of the Rule, other than those Numerical Guidelines applicable to Multi-
Stock Events, would apply to reviews of Trigger Trades and subsequent
transactions. FINRA proposes to review all transactions that trigger a
trading pause and subsequent transactions occurring before the trading
pause is in effect for transactions otherwise than on an exchange.
Where a trading pause was triggered by a price decline (rise), FINRA
shall deem as clearly erroneous all such transactions that occurred at
a price lower (higher) than the Trading Pause Trigger Price. Because
the proposed rules for trading pauses would only apply within Regular
Trading Hours, an execution would be reviewed and nullified as clearly
erroneous as follows:
------------------------------------------------------------------------
Numerical guidelines (subject
transaction's % difference
Reference price or product from the trading pause trigger
price)
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Greater than $0.00 up to and including 10
$25.00.
Greater than $25.00 up to and including 5
$50.00.
Greater than $50.00.................... 3
Leveraged ETF/ETN securities........... Regular Trading Hours Numerical
Guidelines multiplied by the
leverage multiplier (i.e. 2x).
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Trades occurring after a trading halt is in effect may be deemed in
violation of FINRA Rule 5260 (Prohibition on Transactions, Publication
of Quotations, or Publication of Indications of Interest During Trading
Halts) and will be deemed clearly erroneous.
FINRA reminds members that they must have policies and procedures
in place that are reasonably designed to ensure that, among other
things, members promptly cease effecting transactions during a halt as
required by FINRA Rule 5260.
Additional Conforming Revisions to Paragraphs (b)(1) and (b)(3)
Based on proposed paragraph (b)(2), FINRA has proposed certain
conforming changes to paragraphs (b)(1) and (b)(3) of the existing
Rule, as described below.
Under current FINRA Rule 11892, a transaction may be found to be
clearly erroneous only if the price of the transaction to buy (sell)
that is the subject of the complaint is greater than (less than) the
Reference Price by an amount that equals or exceeds the Numerical
Guidelines set forth in paragraph (b)(1) of the Rule. The ``Reference
Price'' is currently defined as the consolidated last sale immediately
prior to the execution(s) under review except for in Unusual
Circumstances as described in paragraph (b)(2) of the Rule. FINRA
proposes modifying paragraph (b)(1) consistent with the changes
described above such that FINRA shall use the consolidated last sale
immediately prior to the execution(s) under review as the Reference
Price except for: (A) Multi-Stock Events involving twenty or more
securities, as described in proposed paragraph (b)(2); (B) transactions
not involving a Multi-Stock Event as described in proposed paragraph
(b)(2)
[[Page 36758]]
that trigger a trading pause and subsequent transactions, as described
in proposed paragraph (b)(4), in which case the Reference Price shall
be determined in accordance with that paragraph (b)(4); and (C) in
other circumstances, such as, for example, relevant news impacting a
security or securities, periods of extreme market volatility, sustained
illiquidity, or widespread system issues, where use of a different
Reference Price is necessary for the maintenance of a fair and orderly
market and the protection of investors and the public interest. FINRA
also proposes modifying paragraph (b)(1) to reduce uncertainty as to
the applicability of the Numerical Guidelines, by requiring a finding
that an execution was clearly erroneous if such execution exceeds the
Numerical Guidelines, subject only to the Additional Factors included
in paragraph (b)(3). Moreover, FINRA proposes revising the existing
description for Multi-Stock Events that is contained on the Numerical
Guidelines chart to make clear that different Numerical Guidelines
apply for Multi-Stock Events involving five or more, but less than
twenty, securities whose executions occurred within a period of five
minutes or less. In addition, FINRA proposes adding to the Numerical
Guidelines chart a row that contains the Numerical Guidelines (30%) for
Multi-Stock Events involving twenty or more securities whose executions
occurred within a period of five minutes or less.
FINRA proposes clarifying paragraph (b)(3) to make clear that the
additional factors set forth in that paragraph are not intended to
provide any discretion to a FINRA official to deviate from the
guidelines that apply to Multi-Stock Events or to transactions in
securities subject to individual stock trading pauses. FINRA also is
combining paragraphs (a)(1) and (a)(2) into one paragraph to provide
that paragraph (b) governs the review of all transactions reported to a
FINRA trade reporting system, whether or not there are similarly
situated transactions in the security on a national securities
exchange. Existing paragraph (a)(3) of the Rule will be renumbered as
(a)(2).
Consistent with the exchanges, FINRA is proposing that the
provisions of this proposed rule change shall be in effect during a
pilot period set to end on December 10, 2010. If the pilot is not
extended or approved as permanent by December 10, 2010, the prior
version of this Rule shall be in effect.
FINRA has requested that the Commission approve the proposed rule
change on an accelerated basis, so that it may become operative as soon
as possible based on the fact that the proposed trading pause rules
adopted by FINRA and several national securities exchanges have now
become fully operative subject to the initial pilot program.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\4\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade and, in general, to protect investors and the
public interest. FINRA believes that the proposed rule change is
consistent with the clearly erroneous rules of other SROs and will
promote the goal of transparency and uniformity across markets
concerning reviews of potentially clearly erroneous executions in
various contexts, including reviews in the context of a Multi-Stock
Event involving twenty or more securities and reviews resulting from a
Trigger Trade and any executions occurring immediately after a Trigger
Trade but before a trading halt is in effect for transactions otherwise
than on an exchange. Further, FINRA believes that the proposed changes
enhance the objectivity of decisions made by FINRA with respect to
clearly erroneous executions.
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\4\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-FINRA-2010-032 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2010-032. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street, NE., Washington, DC 20549, on official business days between
the hours of 10 a.m. and 3 p.m. Copies of such filing also will be
available for inspection and copying at the principal office of FINRA.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make publicly
available. All submissions should refer to File Number SR-FINRA-2010-
032 and should be submitted on or before July 19, 2010.
[[Page 36759]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\5\
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\5\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-15549 Filed 6-25-10; 8:45 am]
BILLING CODE 8010-01-P