[Federal Register Volume 75, Number 165 (Thursday, August 26, 2010)]
[Notices]
[Pages 52574-52576]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-21201]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62748; File No. SR-FINRA-2010-043]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To
Reinstitute Short Exempt Marking for Trade Reporting and OATS
August 20, 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 August 6, 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 and
II 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's trade reporting and Order Audit
Trail System (``OATS'') rules, including changes relating to recent
amendments to SEC Regulation SHO.
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.
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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
On February 26, 2010, the SEC adopted amendments to SEC Regulation
SHO.\3\ These amendments, among other things, implement a short sale
circuit breaker for NMS stocks \4\ triggered by a 10% or more decrease
in the price of the security from such security's closing price as
determined by the listing market for that security at the end of
regular trading hours on the prior trading day. Once the circuit
breaker is triggered, Regulation SHO, as amended, is designed to
generally prohibit the execution or display of short sale orders of a
covered security at a price that is less than or equal to the current
national best bid for the remainder of the day and the following day
(``short sale price test restriction''). In addition to the short sale
price test restriction, the amendments to Regulation SHO reinstitute a
short sale exempt marking category by providing that a broker-dealer
may mark certain qualifying sell orders ``short exempt.'' \5\
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\3\ See Securities Exchange Act Release No. 61595 (February 26,
2010), 75 FR 11232 (March 10, 2010).
\4\ NMS stock means any NMS security other than an option. Rule
600(b)(46) of SEC Regulation NMS defines ``NMS security'' as any
security or class of securities for which transaction reports are
collected, processed, and made available pursuant to an effective
transaction reporting plan, or an effective national market system
plan for reporting transactions in listed options. See 17 CFR
242.600(b)(46).
\5\ The amendments to SEC Regulation SHO became effective on May
10, 2010 with a compliance date of November 10, 2010. See supra note
3.
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Paragraphs (c) and (d) of Rule 201 of SEC Regulation SHO set forth
the provisions pursuant to which an order may be marked ``short
exempt'' once the circuit breaker has been triggered pursuant to
paragraph (b)(3). These provisions include:
Broker-dealer policies and procedures provision.
Seller's delay in delivery.
Odd lot transactions.
Domestic arbitrage.
International arbitrage.
Over-allotments and lay-off sales.
Riskless principal transactions.
Transactions on a volume-weighted average price basis (or
``VWAP'').\6\
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\6\ SEC staff has confirmed that members may use the existing
``.W'' modifier in connection with the VWAP exception of Rule
201(d)(7) of Regulation SHO. The use of the .W modifier would be in
addition to the requirement to report the trade as short exempt.
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In light of the reinstitution of the ``short exempt'' marking
category, FINRA is proposing to amend its trade reporting rules
applicable to over-the-counter trades in NMS stocks to reintroduce the
short sale exempt category.\7\ Specifically, FINRA is proposing that,
for short sales in all NMS stocks as defined in Rule 600(b)(47) of SEC
Regulation NMS, members must indicate on trade reports submitted to
FINRA if a transaction is ``short sale exempt'' (i.e., if it is a short
sale transaction in a ``covered security'' that may be marked ``short
exempt'' pursuant to SEC Regulation SHO).\8\
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\7\ See FINRA Rules 6182 (Trade Reporting of Short Sales), 6282
(Alternative Display Facility), 6380A (FINRA/Nasdaq TRF), 6380B
(FINRA/NYSE TRF), 7230A (FINRA/Nasdaq TRF), and 7230B (FINRA/NYSE
TRF).
\8\ FINRA previously required trade reports to indicate if a
transaction was marked ``short exempt''; however, these requirements
were eliminated following the repeal of SEC Rule 10a-1. See
Securities Exchange Act Release No. 56279 (August 17, 2007), 72 FR
48713 (August 24, 2007) (Notice of Filing and Immediate
Effectiveness of File No. SR-NASD-2007-047).
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Similarly, FINRA is proposing to amend its OATS rules to provide
that, when an order is received or originated, members must record the
designation of an order as a short sale exempt order if the order may
be marked ``short exempt'' pursuant to SEC Regulation SHO.\9\ FINRA
also is proposing to require that members include the price on all
route reports and a short exempt identifier, if applicable.\10\
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\9\ See FINRA Rule 7440(b)(9).
\10\ Whenever a member transmits an order to another member,
ECN, non-member or national securities exchange for handling or
execution, the routing member is responsible for recording and
reporting a route report to OATS. Under the proposal, route reports
would be required to include the price at which the order was
routed, which may be different from the price received from the
customer, and whether the routed order is short exempt. The short
exempt identifier is important for purposes of route reports because
certain short sale orders will be eligible to be marked exempt
solely as a result of the timing and price of the routed order (See
Rule 201(c) of SEC Regulation SHO).
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FINRA is proposing certain additional amendments to its trade
reporting rules, including those applicable to OTC Equity Securities,
as defined in Rule 6420 (i.e., non-NMS stocks) to clarify certain
existing reporting requirements.\11\ First, FINRA is proposing to
clarify that the short sale indicator (and short sale exempt indicator,
for NMS stocks) is required on reports of a ``cross,'' as well as
reports of a ``sell.''
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\11\ See FINRA Rules 6282, 6380A, 6380B, 6622, 7230A, 7230B and
7330.
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Second, FINRA is proposing to codify the existing requirement that
the information listed in the rule must be provided for each trade that
is reported to FINRA. Today, trade report information can be provided
in a single report, if the reporting member submits trade information
for both sides of the trade, or it can be provided in a combination of
reports, if the reporting member and contra side each submits its own
trade information (as described more fully below). For each trade
reported to FINRA, members must indicate, among other things, whether
the seller (either the reporting member or contra side, irrespective of
whether the contra side is a member) is selling short or short exempt.
Unless the contra side will have an opportunity to provide its own
trade information (i.e., unless the contra side is a member using the
trade comparison functionality of the facility),\12\ the reporting
member is responsible for providing complete and accurate information
for both sides of the trade, including information from the contra side
perspective such as sell short and sell short exempt, as applicable.
Thus, the reporting member is responsible for satisfying any applicable
contra side information requirements where: (1) The trade is with a
customer or non-member, (2) the trade is with a member and is ``locked
in'' pursuant to a give up agreement, or (3) the trade is reported as
``tape only'' (i.e., for public dissemination purposes without
clearing) or ``non-tape, non-clearing.'' This reporting requirement is
in effect today; however, the proposed rule change would make it an
express requirement in the rule. If the contra side is a member and
will have an opportunity to provide its own trade information, then the
reporting member is responsible only for providing
[[Page 52576]]
information from the reporting side perspective (and the contra side
will provide information from the contra side perspective).
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\12\ The trade comparison functionality allows the contra party
to accept or decline the trade information submitted by the
reporting party and may only be used by a contra party that is a
member. FINRA notes that the Alternative Display Facility, FINRA/
Nasdaq TRF and ORF offer trade comparison functionality; the FINRA/
NYSE TRF does not offer such functionality. Accordingly, reporting
members are responsible for accurately and completely providing all
information required under the rule for the contra side when
reporting to the FINRA/NYSE TRF.
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The implementation date will be November 10, 2010.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\13\ 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 adopting the proposed rule change
will aid in FINRA's surveillance for member compliance, including with
SEC Regulation SHO.
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\13\ 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 45 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 or disapprove 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-2010-043 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-2010-043. 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 available
publicly. All submissions should refer to File Number SR-FINRA-2010-043
and should be submitted on or before September 16, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-21201 Filed 8-25-10; 8:45 am]
BILLING CODE 8011-01-P