[Federal Register Volume 75, Number 142 (Monday, July 26, 2010)]
[Notices]
[Pages 43588-43589]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-18168]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62533; File No. SR-FINRA-2010-028]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by
Amendment No. 1, To Adopt NASD Rule 3210 (Short Sale Delivery
Requirements) as FINRA Rule 4320 in the Consolidated FINRA Rulebook
July 20, 2010.
On May 21, 2010, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt NASD Rule 3210 as FINRA Rule 4320 in the
consolidated FINRA rulebook. On June 11, 2010, FINRA filed Amendment
No. 1 to the proposed rule change.\3\ The proposed rule change, as
modified by Amendment No. 1, was published for comment in the Federal
Register on June 17, 2010.\4\ The Commission received no comments on
the proposal. This order approves the proposed rule change, as modified
by Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 was a partial amendment that made minor
clarifications, provided additional detail and made technical edits
to the purpose section of the proposed rule change.
\4\ See Securities Exchange Act Release No. 62288 (Jun. 11,
2010), 75 FR 34496 (Jun. 17, 2010).
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I. Description of the Proposed Rule Change
As part of the process of developing a new consolidated rulebook
(``Consolidated FINRA Rulebook''),\5\
[[Page 43589]]
FINRA has proposed to adopt NASD Rule 3210 (Short Sale Delivery
Requirements), with minor changes, as FINRA Rule 4320 in the
Consolidated FINRA Rulebook.
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\5\ FINRA stated that the current FINRA rulebook consists of (1)
FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE
(``Incorporated NYSE Rules'') (together, the NASD Rules and
Incorporated NYSE Rules are referred to as the ``Transitional
Rulebook''). While the NASD Rules generally apply to all FINRA
members, the Incorporated NYSE Rules apply only to those members of
FINRA that are also members of the NYSE (``Dual Members''). FINRA
also stated that FINRA Rules apply to all FINRA members, unless such
rules have a more limited application by their terms. For more
information about the rulebook consolidation process, see
Information Notice, March 12, 2008 (Rulebook Consolidation Process).
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On April 4, 2006, the SEC approved NASD Rule 3210, which applies
short sale delivery requirements to those equity securities not
otherwise covered by the close-out requirements of Regulation SHO. The
Regulation SHO close-out requirements apply only to the equity
securities of ``reporting'' issuers (i.e., issuers that are registered
pursuant to Section 12 of the Act \6\ or that are required to file
reports pursuant to Section 15(d) of the Act \7\).
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\6\ 15 U.S.C. 78l.
\7\ 15 U.S.C. 78o(d).
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NASD Rule 3210, among other things, requires participants of
registered clearing agencies to take action on failures to deliver that
exist for 13 consecutive settlement days in certain non-reporting
securities. In addition, if the fail to deliver position is not closed
out in the requisite time period, a participant of a registered
clearing agency or any broker-dealer for which it clears transactions
is prohibited from effecting further short sales in the particular
specified security without borrowing, or entering into a bona fide
arrangement to borrow, the security until the fail to deliver position
is closed out. Pursuant to NASD Rule 3210, FINRA publishes a daily
``Threshold Security List.'' \8\ The rule became effective on July 3,
2006. In adopting NASD Rule 3210, FINRA believed that the rule
represented an important step in reducing long-term fails to deliver in
this sector of the marketplace.
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\8\ FINRA stated that, for purposes of Rule 3210, a non-
reporting threshold security is any equity security that is not a
reporting security and, for five consecutive settlement days, has:
(1) Aggregate fails to deliver at a registered clearing agency of
10,000 shares or more; and (2) a reported last sale during normal
market hours (9:30 a.m. to 4 p.m., Eastern Time (ET)) for the
security on that settlement day that would value the aggregate fail
to deliver position at $50,000 or more.
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In July 2009, the SEC adopted the substance of temporary Rule 204T
\9\ under Regulation SHO as a permanent rule, Rule 204 of Regulation
SHO.\10\ This rule is intended to further the goal of reducing fails to
deliver and addressing potentially abusive ``naked'' short selling in
all equity securities by requiring that, subject to certain limited
exceptions, if a registered clearing agency participant has a fail to
deliver position resulting from a short sale at a registered clearing
agency it must immediately purchase or borrow securities to close out a
fail to deliver position by no later than the beginning of regular
trading hours on the settlement day following settlement date.\11\
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\9\ See Securities Exchange Act Release No. 58785 (Oct. 14,
2008), 73 FR 61678 (Oct. 17, 2008).
\10\ See Securities Exchange Act Release No. 60388 (July 27,
2009), 74 FR 38266 (July 31, 2009).
\11\ Rule 204 of Regulation SHO further provides that fails to
deliver resulting from long sales or certain bona fide market making
activity must be closed out by no later than the beginning of
regular trading hours on the third settlement day after settlement
date (i.e., T+6).
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Notwithstanding the SEC's adoption of this new rule, FINRA believes
proposed FINRA Rule 4320 continues to be necessary to provide
regulatory coverage for fails to deliver in non-reporting over-the-
counter equity securities that pre-exist the SEC's implementation of
temporary Rule 204T in September 2008.\12\
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\12\ Likewise, the SEC is retaining Rule 203(b)(3) of Regulation
SHO in order to cover pre-existing temporary Rule 204T fails in
threshold securities as defined in Rule 203(c)(6) of Regulation SHO.
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Therefore, FINRA has proposed to adopt NASD Rule 3210 as FINRA Rule
4320 with minor changes to delete language that provided allowances for
``grandfathered'' securities during the initial implementation period
of NASD Rule 3210 and that, therefore, is no longer relevant. The
proposed rule change also clarifies, consistent with Regulation SHO,
the borrowing requirements for clearing agency participants, including
broker-dealers for which they clear transactions, that sell short non-
reporting threshold securities for which a fail to deliver position has
not been closed out in the requisite time. Specifically, if a fail to
deliver position is not closed out in accordance with Rule 4320(a), the
clearing agency participant and any broker-dealer for which it clears,
including market makers otherwise entitled to rely on the Rule
203(b)(2)(iii) exception of Regulation SHO, would not be able to short
sell the non-reporting threshold security either for itself or for the
account of another, unless it has previously arranged to borrow or
borrowed the security, until the participant closes out the fail to
deliver position by purchasing securities of like kind and quantity and
that purchase has cleared and settled at a registered clearing agency.
In addition, the proposed rule change makes certain technical
amendments to the rule, including changing references to ``NASD'' to
``FINRA.''
FINRA has represented that it will announce the implementation date
of the proposed rule change in a Regulatory Notice to be published no
later than 90 days following Commission approval. The implementation
date will be no more than 180 days following Commission approval.
III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act, and the rules and regulations thereunder that
are applicable to a national securities association.\13\ In particular,
the Commission believes that the proposed rule change is consistent
with the provisions of Section 15A(b)(6) of the Act, in that it is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest. The Commission believes that the proposed rule change to
adopt NASD Rule 3210 as FINRA Rule 4320 in the Consolidated FINRA
Rulebook continues to be necessary to provide regulatory coverage for
fails to deliver in non-reporting over-the-counter equity securities
and will continue to help reduce long-term fails to deliver in this
sector of the marketplace.
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\13\ In approving the proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (File No. SR-FINRA-2010-028), as
modified by Amendment No. 1, be and hereby is approved.
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\14\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-18168 Filed 7-23-10; 8:45 am]
BILLING CODE 8010-01-P