Document ID: SEC-2009-0228-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2009-02-19T05:00Z

[Federal Register: February 19, 2009 (Volume 74, Number 32)]
[Notices]               
[Page 7718-7719]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19fe09-86]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59382; File No. SR-FINRA-2008-064]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Amend NASD 
Interpretive Material (IM) 2110-2 (Trading Ahead of Customer Limit 
Order)

 February 11, 2009.

I. Introduction

    On December 17, 2008, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission 
(``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 amend NASD Interpretive Material (IM) 2110-2 
(Trading Ahead of Customer Limit Order) with respect to the 
determination of the minimum price improvement obligation in an OTC 
equity security priced below $1.00 where there is no published current 
inside spread or there is only a one-sided quote. The proposed rule 
change was published for comment in the Federal Register on December 
31, 2008.\3\ The Commission received no comment letters on the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 59138 (December 22, 
2008), 73 FR 80482.
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II. Description of the Proposed Rule Change

    IM-2110-2 (commonly referred to as the ``Manning Rule'') generally 
prohibits a member from trading for its own account at prices that 
would satisfy a customer's limit order unless the member immediately 
thereafter executes the customer limit order at the price at which it 
traded for its own account or at a better price. Under amendments to 
IM-2110-2 that the Commission approved on September 12, 2008,\4\ and 
that became effective on November 11, 2008,\5\ IM-2110-2 sets forth the 
minimum level of price improvement, depending on the price of the 
customer limit order, that a member must provide in order to trade 
ahead of an unexecuted customer limit order without triggering the 
protections provided by the Manning Rule.
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    \4\ See Securities Exchange Act Release No. 58532 (September 12, 
2008), 73 FR 54649 (September 22, 2008) (order approving SR-NASD-
2007-041).
    \5\ See Regulatory Notice 08-49 (September 2008).
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    The minimum price improvement tiers set forth in IM-2110-2 are as 
follows:
    (1) For customer limit orders priced greater than or equal to 
$1.00, the minimum amount of price improvement required is $0.01 for 
NMS stocks and the lesser of $0.01 or one-half (\1/2\) of the current 
inside spread for OTC equity securities;
    (2) For customer limit orders priced greater than or equal to $.01 
and less than $1.00, the minimum amount of price improvement required 
is the lesser of $0.01 or one-half (\1/2\) of the current inside 
spread;
    (3) For customer limit orders priced less than $.01 but greater 
than or equal to $0.001, the minimum amount of price improvement 
required is the lesser of $0.001 or one-half (\1/2\) of the current 
inside spread;
    (4) For customer limit orders priced less than $.001 but greater 
than or equal to $0.0001, the minimum amount of price improvement 
required is the lesser of $0.0001 or one-half (\1/2\) of the current 
inside spread;
    (5) For customer limit orders priced less than $.0001 but greater 
than or equal to $0.00001, the minimum amount of price improvement 
required is the lesser of $0.00001 or one-half (\1/2\) of the current 
inside spread;
    (6) For customer limit orders priced less than $.00001, the minimum 
amount of price improvement required is the lesser of $0.000001 or one-
half (\1/2\) of the current inside spread; and
    (7) For customer limit orders priced outside the best inside 
market, the minimum amount of price improvement required must either 
meet the requirements set forth above or the member must trade at a 
price at or inside the best inside market for the security.
    Therefore, if a firm is holding a customer limit order to buy 
priced at $.75 and the applicable minimum price improvement standard is 
$.01, the firm would be permitted to buy at $.76 or higher without 
triggering the requirements of IM-2110-2.
    The proposed rule change is intended to provide members with an 
alternative method of calculating the minimum price improvement in 
cases where a member receives a limit order for an OTC equity security 
priced below $1.00 and there is no quoted market. The minimum price-
improvement standards are either a fixed amount as noted above or one-
half (\1/2\) of the current inside spread. However, where there is no 
current inside spread, the minimum price-improvement standard defaults 
to

[[Page 7719]]

the fixed amount which, in certain circumstances, can lead to an 
anomalous result. For example, where a member receives a customer limit 
order priced at $.01 and there is no current published inside spread, 
the minimum price-improvement standard would still be equal to $.01, 
which would require the member to sell at $.00 ($.01 minus $.01) or buy 
at $.02 ($.01 plus $.01) to avoid triggering the customer limit order 
(depending on whether the customer order is a buy or sell order). 
Therefore, the current rule could have unduly harsh results, 
particulary in cases where the price is near the edge of a tier and 
there is no quoted market.
    Accordingly, FINRA proposes to amend IM-2110-2 to provide that, for 
the purpose of determining the minimum price improvement obligation 
where there is no published current inside spread, member firms may 
calculate a current inside spread by contacting and obtaining priced 
quotations from at least two unaffiliated dealers. FINRA believes that 
obtaining priced quotations from at least two unaffiliated dealers 
provides an adequate proxy for an inside spread typically displayed for 
an OTC equity security, and notes that members are free to contact more 
than two unaffiliated dealers. FINRA also notes that, once the member 
has obtained bid and ask prices from at least two unaffiliated dealers, 
the proposed rule requires that the highest bid and lowest offer 
obtained must be used as the basis for calculating the current inside 
spread for purposes of determining the member's minimum price 
improvement obligation. In addition, where there is a one-sided quote, 
the proposed rule change permits a member to determine the current 
inside spread by using the best price obtained from at least two 
unaffiliated dealers on the other side of the quote.
    Members must document: (1) The name of each dealer contacted; and 
(2) the quotations received that were used as the basis for determining 
the current inside spread. FINRA represents that the proposed rule 
change would apply solely to minimum price-improvement calculations 
under IM-2110-2 and would not implicate other rules or requirements 
(e.g., Three Quote Rule).

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\6\ In particular, the Commission finds that the proposed 
rule change is consistent with the provisions of Section 15A(b)(6) of 
the Act,\7\ 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.
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    \6\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the proposed rule change provides a 
reasonable method of calculating the current inside spread under IM-
2110-2 for OTC equity securities priced below $1.00 where there is no 
current published inside spread or there is only a one-sided quote. The 
Commission notes that FINRA members that use the proposed method of 
calculating the current inside spread are required to document the name 
of each dealer contacted and the quotations received for the purposes 
of determining the current inside spread. The Commission believes that 
the documentation requirement is important to allow proper oversight of 
calculating the current inside spread, when there is no current 
published inside spread, or there is only a one-sided quote, in an OTC 
equity security priced below $1.00.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-FINRA-2008-064) be, and 
hereby is, approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-3426 Filed 2-18-09; 8:45 am]

BILLING CODE 8011-01-P