Document ID: SEC-2008-0696-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-05-13T04:00Z

[Federal Register: May 13, 2008 (Volume 73, Number 93)]
[Notices]               
[Page 27587-27588]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13my08-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57784; File No. SR-FINRA-2007-039]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change as Modified by 
Amendment Nos. 1 and 2 Thereto To Establish an Exemption for Certain 
Regulation NMS-Compliant Intermarket Sweep Orders from the Requirements 
in IM-2110-2 (Trading Ahead of Customer Limit Order) and Rule 2111 
(Trading Ahead of Customer Market Orders)

May 6, 2008.

I. Introduction

    On December 21, 2007, 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 establish an exemption for certain Regulation 
NMS-compliant Intermarket Sweep Orders (``ISOs'') from the requirements 
governing trading ahead of customer limit orders and customer market 
orders. On February 11, 2008, FINRA filed Amendment No. 1 to the 
proposed rule change. The proposed rule change, as amended, was 
published for comment in the Federal Register on March 5, 2008.\3\ The 
Commission received one comment letter regarding the proposal.\4\ FINRA 
responded to the comment letter on March 26, 2008.\5\ On April 30, 
2008, FINRA filed Amendment No. 2 to the proposed rule change.\6\

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 57388 (February 27, 
2008), 73 FR 11963.
    \4\ See submission via SEC WebForm from Craig Carlino, Monroe 
Securities, dated March 13, 2008.
    \5\ See letter from Andrea D. Orr, Assistant General Counsel, 
FINRA, to Nancy M. Morris, Secretary, Commission, dated March 26, 
2008 (``FINRA letter'').
    \6\ In Amendment No. 2, FINRA deleted definitions that were 
either unnecessary or duplicative from the proposed rule text. 
Because the Amendment is technical in nature, it is not subject to 
notice and comment.

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[[Page 27588]]

    This order approves the proposed rule change, as modified by 
Amendment Nos. 1 and 2.

II. Description of the Proposed Rule Change

    FINRA is proposing to establish an exemption for certain Regulation 
NMS-compliant ISOs \7\ from the Rule and the Interpretive Material 
(``IM'') that govern trading ahead of customer limit orders and 
customer market orders. Under the proposed rule, a member will be 
exempt from its obligations with respect to trading for its own account 
if an ISO is routed in compliance with Rule 600(b)(30)(ii) of 
Regulation NMS, and the customer limit order or market order is 
received after the member routed the ISO. The exemption will also apply 
if the member executes an ISO to facilitate a customer limit order or 
market order, and the customer has consented to not receiving the 
better prices obtained by the ISO.
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    \7\ Regulation NMS defines an ISO as a limit order for an NMS 
stock that meets the following requirements: (i) When routed to a 
trading center, the limit order is identified as an intermarket 
sweep order; and (ii) simultaneously with the routing of the limit 
order identified as an intermarket sweep order, one or more 
additional limit orders, as necessary, are routed to execute against 
the full displayed size of any protected bid, in the case of a limit 
order to sell, or the full displayed size of any protected offer, in 
the case of a limit order to buy, for the NMS stock with a price 
that is superior to the limit price of the limit order identified as 
an intermarket sweep order. These additional routed orders also must 
be marked as intermarket sweep orders. See 17 CFR 242.600(b)(30).
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    In its filing with the Commission, FINRA stated that the proposed 
exemption is similar to an exemption adopted by the New York Stock 
Exchange LLC to its Rule 92 (Limitations on Members' Trading Because of 
Customers' Orders). The ISO exemption to Rule 92 was approved by the 
Commission on July 5, 2007.\8\
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    \8\ See Securities Exchange Release No. 56017 (July 5, 2007), 72 
FR 38110 (July 12, 2007) (SR-NYSE-2007-21).
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III. Summary of Comments

    The Commission received one comment letter in response to the 
proposed rule change.\9\ The commenter stated that the implementation 
of IM-2110-2 will reduce liquidity and result in inferior executions 
for public investors who own non-penny stock OTC securities.\10\ The 
commenter also objected to the change to the definition of the size of 
the order on which terms and conditions may be negotiated.\11\
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    \9\ Supra note 4.
    \10\ Id. at 1-2.
    \11\ Id. at 2.
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    FINRA responded to the comment letter on March 26, 2008.\12\ FINRA 
stated that the comment letter was not germane to the proposed rule 
change, as it did not pertain to the proposed ISO exemption.\13\ 
According to FINRA, the comments related to a rule change, previously 
approved by the Commission,\14\ which expanded IM-2110-2 to apply to 
OTC equity securities.\15\
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    \12\ Supra note 5.
    \13\ Id. at 1.
    \14\ See Securities Exchange Act Release No. 55351 (February 26, 
2007), 72 FR 09810 (March 5, 2007) (SR-NASD-2005-146).
    \15\ FINRA letter at 2.
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IV. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change, the 
comment letter, and FINRA's response to the comment letter, and 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 \16\ and, in particular, Section 
15A(b)(6) of the Act,\17\ 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.
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    \16\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that it is reasonable for FINRA to amend 
IM-2110-2 and Rule 2111 to exempt members when routing certain 
Regulation NMS-compliant ISOs. The proposed rule change should enable 
members to comply with the ISO routing requirements of Rule 611 of 
Regulation NMS without violating IM-2110-2 and Rule 2111 and, given the 
ISO routing exemption that currently exists under NYSE Rule 92, will 
subject ISO routing to consistent standards.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-FINRA-2007-039), as modified 
by Amendment Nos. 1 and 2, be, and it hereby is, approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E8-10594 Filed 5-12-08; 8:45 am]

BILLING CODE 8010-01-P