52574 Federal Register / Vol. 75, No. 165 / Thursday, August 26, 2010 / Notices 

144See F.J. Kaufman & Co., 50 S.E.C. at 168–69 

(discussing both reasonable-basis and customerspecific suitability); Siegel, 2007 NASD Discip. 

LEXIS 20, at *36–40 (discussing reasonable-basis 

suitability and due-diligence requirement 

thereunder); see also Regulatory Notice 10–22, 2010 

FINRA LEXIS 43, at *10–20 (April 2010) 

(discussing due diligence required for reasonablebasis suitability in context of recommended private 

offerings); Notice to Members 03–71, 2003 NASD 

LEXIS 81, *5–6 (Nov. 11, 2003) (discussing due 

diligence requirement for reasonable-basis 

suitability in context of recommendations of nonconventional investments). 

145See Cornell Letter, supra note 34; Corporate 

Law Center & Investor Rights Clinic Letter, supra 

note 61; NASAA Letter, supra note 47. 

146See Cornell Letter, supra note 34; Corporate 

Law Center & Investor Rights Clinic Letter, supra 

note 61; NASAA Letter, supra note 47. 

147See Corporate Law Center & Investor Rights 

Clinic Letter, supra note 61. 

148 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

the protection of investors.144 This is 

especially true in light of the increasing 

complexity of certain products and 

strategies. 

Elimination of Interpretive Material 

Following NASD Rule 2310 

In connection with the new suitability 

rule, FINRA proposes eliminating many 

and modifying some of the IMs that 

follow NASD Rule 2310. This aspect of 

the proposal also generated several 

comments. 

• Comments: 

A few commenters were concerned 

that the proposal did not include some 

of the current IMs, especially IM–2310– 

2.145 These commenters believe that it is 

important to maintain the statement in 

IM–2310–2 that brokers can be 

disciplined for excessive trading, 

unauthorized trading, and fraud.146 One 

commenter noted in particular that this 

IM was the only place in the entire 

NASD conduct rules explicitly 

prohibiting unauthorized trading.147

• FINRA’s Response: 

FINRA continues to believe that most 

of the current IMs following NASD Rule 

2310 should be eliminated or modified 

because they are no longer necessary. As 

discussed in detail in Item II.A. of this 

filing, some are duplicative of other 

rules and others would be rendered 

unnecessary by changes proposed in the 

new suitability rule. For example, as 

noted in Item II.A., it is well-settled that 

unauthorized trading violates just and 

equitable principles of trade under 

FINRA Rule 2010. Consequently, the 

elimination of the discussion of 

unauthorized trading in the IMs 

following the suitability rule in no way 

alters the longstanding view that 

unauthorized trading clearly violates 

FINRA’s rules. 

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 rulecomments@sec.gov. Please include File 

Number SR–FINRA–2010–039 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–2010–039. 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–2010–039 and 

should be submitted on or before 

September 9, 2010. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.148

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–21228 Filed 8–25–10; 8:45 am] 

BILLING CODE 8010–01–P 

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. 

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. 

mstockstill on DSKH9S0YB1PROD with NOTICES

Federal Register / Vol. 75, No. 165 / Thursday, August 26, 2010 / Notices 52575 

3See Securities Exchange Act Release No. 61595 

(February 26, 2010), 75 FR 11232 (March 10, 2010). 

4NMS 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). 

5The amendments to SEC Regulation SHO 

became effective on May 10, 2010 with a 

compliance date of November 10, 2010. See supra 

note 3. 

6SEC 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. 

7See 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). 

8FINRA 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). 

9See FINRA Rule 7440(b)(9). 

10Whenever 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). 

11See FINRA Rules 6282, 6380A, 6380B, 6622, 

7230A, 7230B and 7330. 

12The 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. 

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 brokerdealer may mark certain qualifying sell 

orders ‘‘short exempt.’’ 5

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

In light of the reinstitution of the 

‘‘short exempt’’ marking category, 

FINRA is proposing to amend its trade 

reporting rules applicable to over-thecounter 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

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

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.’’ 

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 nonmember, (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 

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52576 Federal Register / Vol. 75, No. 165 / Thursday, August 26, 2010 / Notices 

13 15 U.S.C. 78o–3(b)(6). 14 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3FICC withdrew a substantively identical 

proposed rule change filed on August 4, 2010, that 

sought approval without requesting that the 

approval would be temporary. 

4Securities Exchange Act Release No. 60510 

(August 17, 2009), 74 FR 42716 (August 24, 2009). 

information from the reporting side 

perspective (and the contra side will 

provide information from the contra 

side perspective). 

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. 

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 rulecomments@sec.gov. 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

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–21201 Filed 8–25–10; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–62743; File No. SR–FICC– 

2010–05] 

Self-Regulatory Organizations; Fixed 

Income Clearing Corporation; Notice of 

Filing and Order Granting Accelerated 

Approval on a Temporary Basis of 

Proposed Rule Change To Modify the 

Rules of the Government Securities 

Division Regarding the Calculation of 

Clearing Fund Deposits Relating to 

Inter-Dealer Broker Positions 

August 19, 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 

18, 2010, the Fixed Income Clearing 

Corporation (‘‘FICC’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change described in Items I and II 

below, which items have been prepared 

primarily by FICC.3 The Commission 

previously approved the proposal on a 

temporary basis.4 The Commission is 

publishing this notice and order to 

solicit comments on the proposed rule 

change from interested parties and to 

grant accelerated approval through 

February 18, 2011. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The proposed rule change seeks to 

modify the rules of FICC’s Government 

Securities Division (‘‘GSD’’) regarding 

the calculation of clearing fund 

requirements relating to inter-dealer 

broker (‘‘IDB’’) positions. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

FICC 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. FICC has prepared 

summaries, set forth in sections (A), (B), 

and (C) below, of the most significant 

aspects of these statements. 

mstockstill on DSKH9S0YB1PROD with NOTICES