Document ID: SEC-2008-0965-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-07-14T04:00Z

[Federal Register: July 14, 2008 (Volume 73, Number 135)]
[Notices]               
[Page 40407-40409]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14jy08-132]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58114; File No. SR-NASD-2007-041]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc. (f/k/a National Association of Securities Dealers, 
Inc.); Notice of Filing of Amendment No. 2 to Proposed Rule Change To 
Amend the Minimum Price-Improvement Standards Set Forth in NASD 
Interpretive Material (IM) 2110-2

July 7, 2008.
    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 26, 2008, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) \3\ filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') Amendment No. 2 to SR-NASD-2007-041 as 
described in Items I, II, and III below, which Items have been 
substantially prepared by FINRA.\4\ The Commission is publishing this 
notice to solicit comments on the proposed rule change, as modified by 
Amendment No. 2, from interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On July 26, 2007, the Commission approved a proposed rule 
change filed by the NASD to amend the NASD's Certificate of 
Incorporation to reflect its name change to Financial Industry 
Regulatory Authority, Inc., or FINRA, in connection with the 
consolidation of the member firm regulatory functions of NASD and 
NYSE Regulation, Inc. See Securities Exchange Act Release No. 56146 
(July 26, 2007), 72 FR 42190 (August 1, 2007) (SR-NASD-2007-053).
    \4\ FINRA filed the original proposed rule change on June 27, 
2007. FINRA filed Amendment No. 1 to the proposed rule change on May 
20, 2008. Amendment No. 2 supersedes and replaces Amendment No. 1.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA proposes to amend the proposed rule change to address an 
inconsistency in the application of the proposed minimum price-
improvements standards. The text of the proposed rule change is 
available on FINRA's Web site (http://www.finra.org), at FINRA's 
principal office, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of the 
Proposed Rule Change

 A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On June 27, 2007, FINRA filed with the Commission SR-NASD-2007-041, 
proposing amendments to the minimum price-improvement provisions in IM-
2110-2 (``original proposal''). On August 28, 2007, the Commission 
published for comment the proposed rule change in the Federal 
Register.\5\ The Commission received one commenter letter on the 
proposed rule change.\6\ On November 1, 2007, FINRA submitted a 
response letter to the Commission.\7\ On May 20, 2008, FINRA filed with 
the Commission Amendment No. 1 to the proposed rule change. FINRA is 
filing this Amendment No. 2, which replaces and supersedes Amendment 
No. 1 to SR-NASD-2007-041, to amend the proposed rule change to address 
an inconsistency in the application of the proposed minimum price 
improvement standards as discussed herein.
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    \5\ See Securities Exchange Act Release No. 56297 (August 21, 
2007), 72 FR 49337 (August 28, 2007) (notice of filing of SR-NASD-
2007-041).
    \6\ See Letter to Secretary, Commission, from Jess Haberman, 
Compliance Director, Fidessa Corp., dated September 5, 2007.
    \7\ See Letter from Andrea Orr, FINRA, to Nancy M. Morris, 
Secretary, Commission, dated November 1, 2007 (``FINRA Response 
Letter'').
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    On February 26, 2007, the Commission approved SR-NASD-2005-146, 
which, among other things, expanded the scope of IM-2110-2 \8\ to apply 
to over-the-counter (``OTC'') equity securities and amended the minimum 
level of price-improvement that a member must provide to trade ahead of 
an unexecuted customer limit order (``price-improvement standards''). 
The rule changes in SR-NASD-2005-146 were initially scheduled to become 
effective on July 26, 2007.\9\
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    \8\ Currently, IM-2110-2 generally prohibits a member from 
trading for its own account in an exchange-listed security at a 
price that is equal to or better than an unexecuted customer limit 
order in that security, unless the member immediately thereafter 
executes the customer limit order at the price at which it traded 
for its own account or better.
    \9\ See NASD Notice to Members 07-19 (April 2007).
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    Following Commission approval of SR-NASD-2005-146, several firms 
raised concerns regarding the timing of the implementation of the 
proposed rule change and the application of the approved minimum price-
improvement standards. In response to these concerns, FINRA filed a 
proposed rule change to delay the effective date of the changes in SR-
NASD-2005-146 pending its review of the amended price-improvement 
standards.\10\
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    \10\ See Securities Exchange Act Release No. 56103 (July 19, 
2007), 72 FR 40918 (July 25, 2007) (notice of filing and immediate 
effectiveness of SR-NASD-2007-039). See also See Securities Exchange 
Act Release No. 56822 (November 20, 2007), 72 FR 67326 (November 28, 
2007) (notice of filing and immediate effectiveness of SR-FINRA-
2007-023); and Securities Exchange Act Release No. 57133 (January 
11, 2008), 73 FR 3500 (January 18, 2008) (notice of filing and 
immediate effectiveness of SR-FINRA-2007-038).
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    Subsequently, FINRA filed SR-NASD-2007-041 with the Commission to 
further amend the price-improvement standards in IM-2110-2 based on new 
tiered standards that varied according to the price of the customer 
limit order. In response to the publication of the proposed rule change 
in the Federal Register, the Commission received one comment letter on 
the proposal.\11\
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    \11\ See supra note 6.
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    As further detailed in the FINRA Response Letter, the commenter 
noted an inconsistency in the application of proposed minimum price-
improvement standards in low-priced securities when the customer limit 
order and the proprietary trade fall into different minimum price 
improvement tiers (e.g., a customer limit order to sell is priced

[[Page 40408]]

at $1.00 and the proprietary trade is at $.998). For example, assume 
the best inside market for an NMS stock is $.996 to $1.00 and a firm is 
holding customer limit orders to sell at prices of $.998 and $1.00. If 
the firm sells for its own account at $.996, only customer limit orders 
to sell priced below $.998 and from $1.00 up to, but not including, 
$1.006 would be protected due to the firm's $.996 triggering 
proprietary trade. As a result, the firm would not have an obligation 
under IM-2110-2 to protect the more aggressively priced $.998 customer 
limit order to sell (i.e., the minimum price improvement standard 
applicable to that order is the lesser of $.01 or one-half (\1/2\) of 
the current inside spread ($.002 (\1/2\ of $.004)), such that the $.996 
proprietary trade would only trigger customer limit orders priced less 
than $.998), but would have an obligation to protect the $1.00 customer 
limit order to sell (i.e., the minimum price improvement standard 
applicable to that order is $.01 such that a $.996 proprietary trade 
would trigger customer limit orders priced at $1.00 up to, but not 
including, $1.006).
    In the FINRA Response Letter, FINRA indicated that firms may choose 
to voluntarily protect those more aggressively priced customer limit 
orders that fall within the gaps, which would not be an unreasonable 
policy or procedure and would be consistent with the principles 
underlying IM-2110-2 and the duty of best execution. However, upon 
further reflection, FINRA believes that it is important that the more 
aggressively priced customer limit orders also receive protection and 
that any potential ``gaps'' be eliminated. Therefore, FINRA is now 
proposing to require, and codify as part of IM-2110-2, that any more 
aggressively priced customer limit orders also receive protection. In 
other words, once a customer limit order is triggered under the Rule, 
firms would be required to protect any more aggressively priced 
customer limit orders, even if those limit orders were not directly 
triggered by the minimum price improvement standards of IM-2110-2. 
FINRA is not, however, mandating any particular order handling 
procedures or execution priorities among protected orders. A firm may 
choose any reasonable methodology for the way in which it executes 
multiple orders triggered by the Interpretive Material, but the firm 
must ensure that such methodology is applied consistently and complies 
with applicable rules and regulations.
    Using the example above, once the limit order priced at $1.00 is 
activated upon the execution of the firm's trade at $.996 (i.e., it is 
activated because it is within .01 of the price of the firm's trade), a 
firm may implement a methodology that executes all more aggressively 
priced customer limit orders first (i.e., the limit order priced at 
$.998) before executing the limit order priced at $1.00. The proposed 
requirements would only apply in the limited circumstance where a firm 
has a limit order that is protected by IM-2110-2, but more aggressively 
priced customer limit orders are not protected. Therefore, in the above 
example, if the firm was only holding a customer limit order to sell of 
$.998 (and not a customer limit order of $1.00), the $.998 order would 
not be triggered by the proposed requirements.
    As noted above, FINRA proposes to implement the proposed rule 
change on the final implementation date of SR-NASD-2005-146, which will 
be 60 days after Commission approval of this filing.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\12\ which requires, among 
other things, that FINRA rules 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 better 
reflects trading in low-priced securities and the application of IM-
2110-2.
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    \12\ 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

    The proposed rule change was published for comment in the Federal 
Register and the SEC received one commenter letter, which was 
previously summarized and responded to in the FINRA Response Letter and 
therefore is not being included as part of this Amendment No. 2.\13\
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    \13\ See supra note 6.
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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, as modified by Amendment No. 2, 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 rule-comments@sec.gov. Please include 
File No. SR-NASD-2007-041 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2007-041. 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 inspection and 
copying 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

[[Page 40409]]

information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NASD-2007-041 and should be submitted on or before 
August 4, 2008.

    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,
Acting Secretary.
[FR Doc. E8-15889 Filed 7-11-08; 8:45 am]

BILLING CODE 8010-01-P