Document ID: SEC-2008-0825-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-06-16T04:00Z

[Federal Register: June 16, 2008 (Volume 73, Number 116)]
[Notices]               
[Page 34061-34063]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16jn08-110]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57935; File No. SR-FINRA-2008-023]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Order Granting Accelerated 
Approval of a Proposed Rule Change Relating to Violations Appropriate 
for Disposition Under FINRA's Minor Rule Violation Plan

June 6, 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 May 27, 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'') the proposed rule change as described in Items I and 
II below, which Items have been substantially prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to approve the 
proposal on an accelerated basis.
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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 proposes to amend NASD Interpretive Material (``IM'') 9216 
\3\ to expand FINRA's Minor Rule Violation Plan (``MRVP'') to include 
violations of options position and exercise limits and contrary 
exercise advice procedures. The text of the proposed rule change is 
available at FINRA, the Commission's Public Reference Room, and http://
www.finra.org.
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    \3\ FINRA has filed with the Commission a proposed rule change 
(SR-FINRA-2008-021) in which FINRA proposes, among other things, to 
adopt NASD IM-9216 as FINRA Rule 9217, without material change. 
Assuming Commission approval of this proposed rule change prior to 
the approval of SR-FINRA-2008-021, FINRA will amend SR-FINRA-2008-
021, as necessary, to reflect such approval.
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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 those statements may be examined at the places specified in 
Item III below. FINRA has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant parts of such statements.

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

1. Purpose
    The proposed rule change would amend NASD IM-9216 to include in 
FINRA's MRVP violations of (1) options position and exercise limits 
under NASD Rule 2860(b)(3) and (b)(4), and (2) contrary exercise advice 
procedures under NASD Rule 2860(b)(23). NASD Rule 9216 sets forth 
FINRA's MRVP, which allows FINRA to impose a fine of up to $2,500 on 
any member or person associated with a member for a minor violation of 
the rules identified in IM-9216 (known as ``Minor Rule Violations''). 
The purpose of the MRVP is to provide meaningful sanctions for minor or 
technical violations of rules when the initiation of a formal 
disciplinary proceeding would be more significant than warranted. Minor 
Rule Violation letters also represent a useful tool for implementing 
the concept of progressive discipline.
    Inclusion of a rule in the MRVP does not mean that all violations 
of that rule should be treated as Minor Rule Violations, and, in fact, 
significant violations would not be handled under the MRVP. 
Accordingly, under the MRVP, FINRA retains the discretion to bring full 
disciplinary proceedings for any violation of a rule included in the 
MRVP.
    The NASD options rules contain provisions imposing limits on the 
size of an options position, and limits on the number of options 
contracts that can be exercised into shares of the underlying security 
during a fixed period. To address inadvertent violations of these 
rules, due to among other things, miscounting, technical problems, or a 
misinterpretation of the position limit calculation methodologies, that 
in the judgment of FINRA do not materially affect the market, FINRA 
proposes adding violations of options position and exercise limits as 
eligible for disposition under the MRVP. Violations of these rules 
deemed to have a manipulative effect or intent would not be treated as 
Minor Rule Violations.
    Options issued by The Options Clearing Corporation (i.e., exchange-
traded options) have specific terms regarding whether options that can 
be settled only by delivery of the asset underlying the option 
(typically an equity security) will be automatically exercised at 
settlement. The NASD options rule has detailed ``contrary exercise 
advice'' (``CEA'') procedures describing the manner in which an option 
holder can elect not to exercise an option that normally would be 
exercised, or exercise an option contract that normally would expire 
worthless. To prevent option holders from unfairly exploiting after-
hours news or market information that affects the price of the 
underlying security, the CEA notices must be submitted to the broker-
dealer and by the broker-dealer to the OCC by certain specified cut-off 
times. Occasionally, due to technical problems or other inadvertent 
errors, firms fail to submit CEA notices within the applicable time 
limits. For those instances, FINRA proposes to have the flexibility to 
treat the violation as a Minor Rule Violation. Violations of the CEA 
rules that exploit or are intended to exploit after-hours news would 
not be treated as Minor Rule Violations.
    FINRA notes that position and exercise limits and CEA violations 
are part of the MRVP of the options

[[Page 34062]]

exchanges,\4\ therefore including them in FINRA's plan would promote 
greater consistency in sanctions among substantively similar rules 
enforced by FINRA and the options exchanges.
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    \4\ See NASDAQ Options Rules, Chapter X, Section 7 (Penalty for 
Minor Rule Violations); Boston Options Exchange Rules, Chapter X, 
Section 2 (Penalty for Rule Violations); Chicago Board Options 
Exchange Rule 17.50 (Imposition of Fines for Minor Rule Violations); 
American Stock Exchange Rule 590. Part 1 (General Rule Violations); 
Philadelphia Stock Exchange Rules F-15 (Minor Infractions of 
Position/Exercise Limits and Hedge Exemptions) and F-35 (Violations 
of Exercise and Exercise Advice Rules for Noncash-Settled Equity 
Option Contracts); International Securities Exchange Rule 1614 
(Imposition of Fines for Minor Rule Violations).
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    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 60 days following 
Commission approval. The effective date will be the date of Commission 
approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\5\ 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 the proposed rule change is 
consistent with Section 15A(b)(7) of the Act \6\ in that it provides 
for the appropriate discipline for violation of FINRA rules. The 
proposed rule change also is consistent with Section 15A(b)(8) of the 
Act \7\ in that it furthers the statutory goals of providing a fair 
procedure for disciplining members and associated persons. FINRA 
believes that the addition of these violations to the MRVP will provide 
FINRA staff with the ability to provide meaningful sanctions for minor 
or technical violations of these rules when the initiation of a formal 
disciplinary proceeding would be more significant than warranted.
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    \5\ 15 U.S.C. 78o-3(b)(6).
    \6\ 15 U.S.C. 78o-3(b)(7).
    \7\ 15 U.S.C. 78o-3(b)(8).
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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. 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 rule-comments@sec.gov. Please include 
File Number SR-FINRA-2008-023 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-FINRA-2008-023. 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 information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2008-023 and should be 
submitted on or before July 7, 2008.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Section 15 of 
the Act and the rules and regulations thereunder applicable to a 
national securities association.\8\ In particular, the Commission finds 
that the proposed rule change is consistent with Section 15A(b)(6) of 
the Act because it is designed to promote just and equitable principles 
of trade, to foster cooperation and coordination with persons engaged 
in regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in securities, 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; and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers, to fix minimum profits, to 
impose any schedule or fix rates of commissions, allowances, discounts, 
or other fees to be charged by its members.\9\
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    \8\ In approving this proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78o-3(b)(6).
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    The Commission further believes that FINRA's proposal to sanction 
members and associated persons who fail to submit CEAs in a timely 
manner or limit the size of an option position or the number of option 
contracts is consistent with Sections 15A(b)(7) and 15A(b)(8) of the 
Act,\10\ which require that the rules of an association enforce 
compliance with, and provide appropriate discipline for, violations of 
Commission and FINRA rules. In addition, the Commission finds that the 
proposal is consistent with the public interest, the protection of 
investors, or otherwise in furtherance of the purposes of the Act, as 
required by Rule 19d-1(c)(2) under the Act,\11\ which governs minor 
rule violation plans. The Commission believes that the proposed rule 
change should strengthen FINRA's ability to carry out its oversight and 
enforcement responsibilities in cases where full disciplinary 
proceedings are unsuitable in view of the minor nature of the 
particular violation.
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    \10\ 15 U.S.C. 78o-3(b)(7) and(b)(8).
    \11\ 17 CFR 240.19d-1(c)(2).
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    In approving this proposed rule change, the Commission in no way 
minimizes the importance of compliance with FINRA's rules and all

[[Page 34063]]

other rules subject to the imposition of fines under the MRVP. The 
Commission believes that the violation of any self-regulatory 
organization rules, as well as Commission rules, is a serious matter. 
However, the MRVP provides a reasonable means of addressing rule 
violations that do not rise to the level of requiring formal 
disciplinary proceedings, while providing greater flexibility in 
handling certain violations. The Commission expects that FINRA will 
continue to conduct surveillance with due diligence and make a 
determination based on its findings, on a case-by-case basis, whether a 
fine of more or less than the recommended amount is appropriate for a 
violation under the MRVP or whether a violation requires formal 
disciplinary action.
    FINRA has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after 
publication of the notice thereof in the Federal Register. The 
Commission hereby grants that request. FINRA's proposal is 
substantially similar to those of other options exchanges, which 
previously have been approved by the Commission.\12\ The Commission 
does not believe that FINRA's proposal raises any novel regulatory 
issues, and no comments were received on any of these earlier 
proposals. Accordingly, the Commission finds good cause, pursuant to 
Section 19(b)(2) of the Act,\13\ for approving the proposed rule change 
prior to the thirtieth day after publication of the notice thereof in 
the Federal Register.
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    \12\ See, e.g., Securities Exchange Act Release No. 57528 (March 
19, 2008), 73 FR 15826 (March 25, 2008) (SR-Phlx-2008-18).
    \13\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\14\ and Rule 19d-1(c)(2) under the Act,\15\ that the proposed rule 
change (SR-FINRA-2008-023), be, and hereby is, approved and declared 
effective on an accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).
    \15\ 17 CFR 240.19d-1(c)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(44).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-13426 Filed 6-13-08; 8:45 am]

BILLING CODE 8010-01-P